Extreme Weather Events – Are They a Problem?

Before the national media became dominated by coronavirus news, the most common news story was about global warming and how it was causing extreme weather events such as fires, heatwaves, tropical storms and floods. Fires in Australia and floods in the UK were the headline stories in the past year.

As investors it is clearly something that you need to be informed about. Such natural catastrophes won’t just affect insurance companies but the economy overall if such events are becoming more common. But are they?  The following note has been recently published by Paul Biggs, an environmental scientist and writer on the subject.

It shows that media coverage of national disasters makes for good news stories but the comments on it by journalists and broadcasters are often inaccurate. We probably have a lot more to fear from global pandemics.

Abbreviations: IPCC: Intergovernmental Panel on Climate Change, SREX: Special Report on Extreme Weather.

Weather Disaster Losses

Peer-reviewed science does not support any claim that disaster losses have been increasing due to climate change, man-made or otherwise (Reference 1).

Hurricanes and Tropical Cyclones

The detection and attribution in trends due to human-caused climate change in Tropical Cyclones, including Hurricanes, has NOT been achieved (1) (2).

Floods

UN IPCC AR5 concludes: “In summary there continues to be a lack of evidence and thus ‘low confidence’ regarding the sign of the trend in the magnitude and/or frequency of floods on a global scale.” IPCC SREX authors helpfully conclude that “the problem of flood losses is mostly about what we do on or to the landscape and that will be the case for decades to come.” (1)

Tornadoes

IPCC SREX: “There is ‘low confidence’ in observed trends in phenomenon such as Tornadoes and Hail…the data are suggestive of an actual decline in Tornado incidence..” (1)

Droughts

IPCC/SREX: “There is ‘low confidence’ in detection and attribution in changes in drought over global land areas since the mid-20th century. (1)

Extreme Temperatures

High temperatures are not a big driver of disaster losses. The IPCC says that there is ‘medium confidence’ that globally the length and frequency of warm spells, including heat waves, has increased since the mid-20th century. The IPCC believes that it is ‘very likely’ that human influence has contributed to these changes, but this relies heavily on climate models that are unable to pin down the exact climate sensitivity to CO2. The extreme 6C model known as RCP8.5 is now generally regarded by more rational scientists as ‘implausible.’ The range is now effectively 1.5C to 3C, with recent published evidence supporting a sensitivity below 2C. (3)

(1) The Rightful Place of Science: Disasters and Climate Change: https://tinyurl.com/yx5kfyos

(2) New WMO Assessment of Tropical Cyclones and Climate Change, Lee et al 2020: https://tinyurl.com/wgqoxm6

(3) Climate sensitivity in the light of the latest energy imbalance evidence: https://tinyurl.com/sawhd28

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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No Budget Surprises from Rishi Sunak

Budget box 3

Chancellor Rishi Sunak just delivered his first budget speech. Bearing in mind how short a time he has had in the job, it’s perhaps not odd that there are no great surprises or revolutions in it.

There are a number of short term measures to counter the economic impact of the coronavirus epidemic on top of the recently announced cut in bank base rate from 0.75% to 0.25% which is surely more of a political gesture than anything because such changes take time to have any impact on the real economy.

There will be a long-term review of business rates but there will be short-term relief for retail and leisure businesses to counter the epidemic impact. The Chancellor is also committing £175 billion to improve economic growth.

The National Insurance threshold will be raised to help the low paid and the planned increase in spirit duty has been cancelled. Fuel duty will remain frozen, when many people expected it to be raised. However red diesel tax relief will be abolished for most sectors other than farmers (it’s news to me that anyone else could use it legally).

Entrepreneurs tax relief will be reformed as widely forecast as it costs the exchequer £2 billion. The lifetime limit will be reduced from £10 million to £1 million. Will that deter entrepreneurs from setting up new businesses? I doubt it.

Twenty-two thousand civil servants will be moved out of London with new Treasury offices in the regions. That will come as a shock to many. Will the Chancellor come under attack from his civil servants like Priti Patel one wonders? But it is surely a positive move to offset the excessive London-centric nature of the economy and the pressure on housing in the South-East.

Some £27 billion will be invested in the strategic road network, including on the A303 that passes Stonehenge.

VAT on digital publications will be abolished so you’ll be able to buy my book “Business Perspective Investing” even cheaper from Amazon – but it’s damn cheap already so I think this may have limited impact except to some educational publishers. It is sensible reform though to align it with paper books.

There is more funding for housing which may help housebuilders and their suppliers and a more general reform of the planning system is forecast. There will be a stamp duty surcharge though for non-UK residents which might affect expensive homes in London but that was widely tipped as something the Chancellor was expected to implement.

For those only aspiring to afford such homes, HMRC is being given more funding to tackle tax avoidance. But the pension tax relief taper relief limit will be raised to £200,000 which may assist many high earners such as NHS consultants. More money is also being given to the NHS although it is not clear whether that and the promise of 40 new hospitals were new commitments or the old ones rehashed.

A closer study of the red book which covers the budget details is required to see if there are any surprises in the small print (see https://www.gov.uk/government/topical-events/budget-2020 ).

Postscript: One announcement snuck in behind the budget is a consultation on changes to the calculation of RPI by the UK Statistics Authority – see https://www.statisticsauthority.gov.uk/consultation-on-the-reform-to-retail-prices-index-rpi-methodology-2/ .

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Venture Capital Trusts, the Baronsmead VCT AGM and Political Turmoil

Yesterday (26/2/2020) I attended the Annual General Meeting of the Baronsmead Venture Trust (BVT) held at Saddlers Hall in the City of London. It was reasonably well attended. I will just report on the major issues:

The Net Asset Value Total Return for last year I calculate to be -2.7% which is certainly disappointing. Note that it is annoying that they do not provide this figure in the Annual Report which is a key measure of the performance of any VCT and which I track for all my VCT holdings. I tried to get in a question on this issue but the Chairman (Peter Lawrence) only allowed 15 minutes for questions which is totally inadequate so I will be writing to him on that subject.

The company does give a chart on page 3 of the Annual Report showing the NAV Total Return for the last ten years. There was also a fall in 2018 according to that chart although I am not sure it is correct as my records show a 6.9% Total Return. I will query that as well.

The main reason for the decline in the return was a disappointing result from the listed company holdings – mainly AIM shares. However it was noted that there was an upturn after the year end and it is now up 17.2%. Major AIM company losses last year were in Crawshaw and Paragon Entertainment – both written off completely now – and a bigger loss in Staffline which was one of their major holdings. However they did realise some profits on Ideagen and Bioventix which were still their largest AIM holdings even so at the year end.

There was criticism from two shareholders about the collapse in Staffline with one asking why they did not exit from Staffline and Netcall (another loser) instead of following them down, i.e. they should have invoked a “stop-loss”. The answer from Ken Wotton who manages the listed portfolio was that there were prospects of recovery and they had sold some Staffline in the past so were still making 4 times the original cost. Comment: Losing money on an AIM portfolio in 2019 is not a great result – certainly my similar portfolio was considerably up last year. They seem to be selling the winners while holding onto the losers – not a sound approach. However it would certainly have been difficult to sell their large holding in Staffline after the company reported accounting/legal problems. Selling such a stake in an AIM company when there are no buyers due to uncertainty about the financial impact is simply impossible at any reasonable price.

One shareholder did question the poor returns from AIM companies when they might have made more from private equity deals. The certainly seem to have ended up with a rag-bag of AIM holdings which could do with rationalising in my opinion. The fact that the new VCT rules will impose more investment in early stage companies may affect the portfolio balance over time anyway.

Robin Goodfellow, who is a director of another VCT, asked why they are holding 20% in cash, and paying a management fee on it. Effectively asking why shareholders should be paying a fee on cash when the manager is paid to invest the cash in businesses. The Chairman’s response was basically to say that this is the deal and he did not provide a reasoned response. This is a typical approach of the Chairman to awkward questions at this company and I voted against his reappointment for that and other reasons. The Chairman is adept at providing casual put-downs to serious questions from shareholders as I have seen often in the past.

Another reason to vote against him was the fact that he has been a director of this company and its predecessor before the merger since 1999 (i.e. twenty-one years). Other directors are also very long serving with no obvious move to replace them. This is contrary to the UK Corporate Governance Code unless explained and likewise for the AIC Corporate Governance Code which says “Where a director has served for more than nine years, the board should state its reasons for believing that the individual remains independent in the annual report”. There is no proper justification given in the Baronsmead Annual Report for this arrangement.

I have complained to the Chairman in the past about them ignoring the UK Corporate Governance Code in this regard so that’s another item to put in a letter to him.

All resolutions were passed on a show of hands.

ShareSoc VCT Meeting

In the afternoon I attended a meeting organised by ShareSoc for VCT investors – they have a special interest group on the subject. VCTs have generally provided attractive and reasonably stable returns (after tax) since they were introduced over twenty years ago and I hold a number of them. In the early days there were a number of very poorly performing and mismanaged funds and I was involved in several shareholder actions to reform them by changes of directors and/or changes of fund managers. Since them the situation has generally improved as the management companies became more experienced but there are still a few “dogs” that need action.

Current campaigns promoted by ShareSoc on the Ventus and Edge VCTs were covered with some success, although they are still “works in progress” to some extent. But they did obtain a change to a proposed performance fee at the Albion VCT.

However there are still too many VCTs where the directors are long serving and seem to have a close relationship with the manager. Baronsmead is one example. It is often questionable whether the directors are acting in the interests of shareholders or themselves. There are also problems with having fund managers on the boards of directors, with unwise performance incentive fees and several other issues. I suggested that ShareSoc should develop some guidelines on these matters and others and there are many other minor issues that crop up with VCTs.

There also needs to be an active group of people pursuing the improvements to VCTs. Cliff Weight of ShareSoc is looking for assistance on this matter and would welcome volunteers – see https://www.sharesoc.org/campaigns/vct-investors-group/ for more information on the ShareSoc VCT group.

Political Turmoil Ongoing

Apart from the disruption to markets caused by the Covid-19 virus which is clearly now having a significant impact on supply chains and consumption of alcohol as reported by Diageo, another issue that might create economic chaos is the decision by Prime Minister Boris Johnson to ditch the political declaration which the Government previously agreed as part of the EU Withdrawal Agreement, i.e. that part which was not legally binding.

The Government has today published a 36 page document that outlines its approach to negotiations on a future trade deal and its ongoing relationship with the EU – see https://tinyurl.com/tlhr3pk . It’s worth a read but there are clearly going to be major conflicts with the EU position on many issues and not just over fish! Needless to say perhaps, but the Brexit Party leaders are happy.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Bernard Baruch – Speculating in the Twentieth Century

Someone on Twitter recently mentioned Barnard Baruch as a legendary investor. I have just read his autobiography which is entitled “Baruch – My Own Story” and it is indeed interesting for several reasons.

Firstly he had a long life and the book covers the period from the American civil war until the 1960s. So it covers more than one period of financial crisis such as the 1929 Wall Street crash and two World Wars. Baruch’s father was a doctor and surgeon in the Confederate Army. For those interested in American history, as I am, it’s a revealing account of why the USA became so dominant in the world financial scene.

Baruch became a stock market speculator and a millionaire by his thirties when a million dollars was worth a great deal. He later became an advisor to Presidents and was involved in US responses to both major wars. But he also was almost wiped out at times in his early career. One thing he learned to do was to always reflect on and try to learn from his mistakes so as not to repeat them – sound advice for all investors.

He is scathing about share tips. So he says about his losses in American Spirits that “Nothing but my own bad judgement was responsible. My course violated every rule of speculation. I acted on unverified information after superficial investigation and, like thousands of other before and since, got just what my conduct deserved”.

It covers an age before the second world war when stock market manipulation was very common and there is an interesting mention of “bucket shops” and how they operated to wipe out their patrons (I mentioned the resurgence of bucket shops in a previous blog post).

Baruch is particularly good on the manias that sweep stock markets. He was adept it seems at knowing when the market was too high and when it was time to get out. He has a chapter on his investment philosophy that includes this advice:

  1. Don’t speculate unless you can make it a full-time job.
  2. Beware of barbers, beauticians, waiters – or anyone – bringing gifts of “inside information” or “tips”.
  3. Before buying a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
  4. Don’t try to buy at the bottom and sell at the top. This can’t be done – except by liars.
  5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
  6. Don’t buy too many different securities. Better only a few investments which can be watched.
  7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects…
  8. Study your tax position to know when you can sell to greatest advantage.
  9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.
  10. Don’t try to be a jack of all investments. Stick to the field you know best.

These are all wise words indeed.

In summary, the book is an interesting read as Baruch is a good communicator as well as it being a slice of America’s financial history when it was dominated by J.P. Morgan, the Rockefellers and other giants of the age.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Avast and Renishaw Announcements, and BBC News

Avast (AVST) issued an announcement this morning covering a trading update and what they are doing about the Jumpshot operation. Avast is primarily an anti-virus software company with a product named AVG although they do have some other products in addition. They sell AVG using the freemium business model, i.e. most “customers” acquire the free version but some pay to upgrade to the priced version. They have 435 million users worldwide. A couple of days ago Avast was hit by an article in the Daily Mail that suggested they were selling user web browsing history to other companies via a 65% owned subsidiary called Jumpshot. The suggestion in the mail article was that the data might not be sufficiently anonymised even though no names or other identifiers were disclosed. The share price of Avast fell sharply as a result and has fallen further today. That’s after another announcement from the company that it was immediately shutting down providing information to Jumpstart and will incur a cash charge in the range of $15m-$25m in the current financial year. It will not affect the 2019 financial results.

Because AVG monitors web access to ensure safety against virus threats, the software can record web sites visited and usage information such as page clicks. That is exceedingly valuable to marketing organisations such as Omnicom (whose name the Mail article mis-spelt) so that they know what sites are being visited and in what volumes. The Avast announcements make clear that no personal information was disclosed and they were always compliant with laws such as GDPR. Perhaps there was a concern that AVG users were not being informed about the data collection although they introduced a specific opt-in in July 2019.

The CEO of Avast, Ondrej Vlcek, has issued a letter in which he apologizes to all concerned – see  https://blog.avast.com/a-message-from-ceo-ondrej-vlcek .

Is this something that should concern AVG users? As a past but not current user of that software, I am not sure I would be. A product that is free to most users (over 90% of them with AVG) often has some “monetization” associated with it. So Facebook users for example disclose personal information and then get targeted with relevant advertisements which the company relies on for its income and profits. This hardly seems to be much different. Providing anonymised information to third parties should not be an issue so long as it is properly handled and anonymised, and there is no suggestion it was not.

This story seems to be very similar to the allegations against GB Group (GBG) which I commented upon recently – see  https://roliscon.blog/2020/01/20/share-price-fall-at-gb-group-over-data-misuse-claim/ where again a Mail article exaggerated the possible problems and the writer seemed to have limited knowledge of the technology being used and the legal background, effectively trying to make a story that might grab people’s attention. That cloud soon blew away when people came to understand the real facts. GBG did not even bother to comment on the allegations.

The actions by Avast have certainly been vigorous though in countering any reputational threat and with Jumpshot only representing about 4% of Avast revenues of about $862 million, it does not seem to be of great concern. Indeed their response is a good example of how to face up to such threats as opposed to the problems faced by Boeing of late and how they handled the 737 Max safety issue (latest cost to Boeing $19 billion) where they initially discounted the seriousness of the problem. But investors who purchased the Avast shares based on “New Year Tips” from at least two publications only weeks ago won’t be too happy on the events – and that included me.

Avast expects 2019 results to be in line with expectations, but for 2020 they only expect revenue growth of “mid-single digit” after adjusting for the Jumpshot impact and with a weighting towards the second-half due to deferral of product releases. I suspect it may take some time for investors to regain confidence in the company.

Another announcement this morning was a half-year report from Renishaw (RSW) which I do not hold. It made for grim reading – revenue down by 13% on the previous half year and statutory profit down by over 80%. The interim dividend was held as before but the directors waived their rights to the dividend which has reduced its cost to the company by over 50%. But the share price has barely moved, presumably because the poor “trading conditions” were highlighted in a previous trading statement.

One aspect that investors need to consider though is that a major proportion of Renishaw’s revenue comes from the Asia-Pacific (APAC) region that includes China. The coronavirus outbreak in China is already being forecast to reduce growth in China and I suspect if the outbreak is not contained it could have a much bigger impact. This might surely affect Renshaw where APAC revenue is 41% of its overall revenue. Stockopedia still reports Renishaw as having a prospective p/e of 49 for the current year to June which does not seem to take the business risks into account.

Other news is that the BBC is cutting staff and refocusing its coverage to appeal to younger consumers. Apparently the BBC employs 6,000 staff in its news service which seems an astonishingly large number. They are proposing to cut 450 but will we notice?

Fran Unsworth, head of its news division suggested they need to do more on digital provision rather than “linear” broadcasting. But there is the suggestion that the affluent, well-educated parts of the BBC audience are “over-served” to quote today’s FT. That sounds like the BBC might move down-market to be more populist – rather like the Daily Mail perhaps with lots of click-bait stories? With BBC news already being dominated by human interest sob-stories and biased political commentary it can surely not get much worse. That is why so many of the “well-educated” perhaps object to paying the TV license fee.

The BBC certainly seems to have lost its way of late. I complained to them recently about one news story and was fobbed off with poor excuses. A complaint to their “regulator” OFCOM obtained no result at all either. The BBC does not adhere to its Charter and their regulator is a toothless poodle. The BBC surely needs substantial reform and they need a better regulator.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Population Growth Problem, Trump at Davos and More Bad News at Ted Baker

 

7.7 Billion and Growing. That was the subtitle of a BBC TV Horizon programme last night on population. Chris Packham was the presenter. He said the world’s population was 5 million 10,000 years ago but by 2050 it is forecast to be 10 billion. He showed the impact of excessive population on biodiversity and on rubbish generation with lots of other negative impacts on the environment. It is surely one of the most important things to think about at present, and will have major economic impacts if not tackled.

The big growth is coming in countries such as Brazil and Nigeria. Sao Paolo is now 5 times the size of London and it’s running out of water. So are many other major cities including London. The growth in population is being driven by better healthcare, people living longer but mainly via procreation. A stable population requires 2.1 babies per family, but it is currently 2.4. In Nigeria it’s 5!

In some countries it is lower than that. It’s 1.7 in the UK (but population is growing from immigration) and it’s 1.4 in Japan where an ageing population is creating social and economic problems.

The FT ran an editorial on the 14th of January suggesting population in Europe needed to be boosted but it received a good rebuke in a letter published today from Lord Hodgson. He said “Global warming comes about as a result of human activity, and the more humans the more activity.  This is before counting the additional costs of the destruction of the natural world and the depletion of the world’s resources. In these circumstances suggesting there is a need for more people seems irresponsible”.

I completely agree with Lord Hodgson and the concerns of Chris Packham. The latter is a patron of a campaigning charity to restrain the growth in population called Population Matters (see  https://populationmatters.org/ ). Making a donation or becoming a member might assist.

For a slightly different view in Davos President Trump made a speech decrying the alarmist climate views and saying “This is a time for optimism, to reject the perennial prophets of doom and their predictions of the apocalypse”. He was followed by a 17-year old with limited education who said just that and got more coverage in some of the media. I believe Trump and moderate environmental writers like Matt Ridley who suggest we can handle rises in world temperature and that the future is still rosy. But we surely do need to tackle the problem of a growing world population.

Chris Packham reported how this was done somewhat too aggressively in India and China but there are other ways to do it via education and financial incentives. Just ensuring enough economic growth in poorer countries will ensure population growth is minimised. Let’s get on with it!

On a more mundane matter, I have previously commented on the audit failure at Ted Baker (TED). The latest bad news today after an independent review it has been discovered that the inventory problem is twice as worse than previously reported. The company now states that inventory in January 2019 was overstated by £58 million. The share price has fallen by another 7% at the time of writing.

This is not just another example of a minor audit failure. Stock value in the Jan 2019 Annual Report was given as £225 million so that is a 22% shortfall. Auditors are supposed to check the stock and its valuation so this is a major error. It will reinforce the complaints of many investors that audit quality in the UK is simply not good enough and the Financial Reporting Council (FRC ) has been doing a rather inept job in regulating and supervising auditors. But will we see the proposed replacement by ARGA anytime soon, which will require some legislation? It seems this is not a high Government priority at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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FinTech Valuations, EU Harmonisation and Fundsmith Report

I received an interesting item from Sharepad/Sharescope by Jeremy Grime this morning. It was headlined “Culture in Payments” but the interesting part was the coverage of the valuations of Fintech companies. It listed some of the recent takeover transactions of such companies where the valuations ranged from multiples of 1.1 to 7.8 times revenue (Source: W.H.Ireland), but many of them were on more than 7 times. Profits are not even mentioned! One example was UK listed company Earthport, taken over at 7.3 times revenue by Visa when it had been consistently loss making.

The article also mentions three small such UK listed companies – Alpha FX (AFX), Argentex (AGFX) and Equals Group (EQLS) and explains how they seem to be evolving from being primarily suppliers of foreign exchange to evolving into banks. I have an interest in one of those companies and another in the sector, but some of  the valuations seem to be way too high to me. There are clearly a lot of share speculators betting on their future, but not all are likely to be successful. Maybe they are just looking further ahead than me (source of the word “speculator” is Latin “speculatus”, the past participle of the verb speculari, which means “to spy out” or “to examine” but it tends to now mean acting without looking).

Chancellor Sajid Javid has put the cat among the pigeons over the weekend by suggesting on Friday in an FT interview that UK businesses need to prepare for divergence from EU rules. He said “There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union”. This may create potential difficulties for large importers/exporters from/to the EU, such as auto manufacturers, aerospace companies, pharmaceutical companies and food/drink suppliers. It is also somewhat inconsistent with the “political declaration” which was part of the Brexit Withdrawal Agreement.

Perhaps this is just a negotiating position. I hope so because some harmonisation on goods might surely be preferable to ease trade flows, even if we depart to some extent from EU financial regulations and other rules. However, just to give you one example where harmonisation might be objected to, the EU is mandating Intelligent Speed Adaptation (ISA) for all new cars from 2022. Many UK drivers consider this unreasonable as speed limits are often inappropriate and there are a number of technical objections to it. Exporting compliant vehicles to the EU should not be difficult for car manufacturers but for German manufacturers if the UK drops that rule then problems may arise. The devil is in the detail on harmonisation. The answer is surely to agree harmonisation on technical standards where there is an obvious benefit to both parties, but not where the regulations attempt to dictate policies in the UK, or how our citizens behave.

Lastly I covered the latest Fundsmith Equity Fund Annual Report in a previous blog post (see https://roliscon.blog/2020/01/18/another-good-year-for-fundsmith/ ). It’s now available from this web page: https://www.fundsmith.co.uk/docs/default-source/analysis—annual-letters/annual-letter-to-shareholders-2019.pdf? and is well worth reading.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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