Halloween or Guy Fawkes Night?
There arrives a point at which our gaze lifts beyond the immediate chaos of politics, beyond the maelstrom, to the line of sight beyond, to calmer waters. We are there now, the US election (on November 5th) no longer matters much to how we trade out the year. The next administration can’t start enacting policies until January, the State of the Union speech and the new Congress.
In the UK, we have had a phoney war since July, awaiting a budget, due the day before Halloween. Budgets are (or should be) a process, albeit leaky. Sadly, most of the leaks and badly flown kites, to date, are predictable, telling of a cash strapped government desperate to pay off their supporters, by ever higher taxes. They hope markets won’t notice. Some chance.
Globally inflation is falling based on goods deflation, a fair bit of which is out of China. The ongoing normalisation of energy supply, post Ukraine, also contribute, and is offset by regulatory rises in labour costs, stagnant productivity, and out of control welfare. None of that changes.
Meanwhile investment and necessities are now the areas being squeezed hardest, and business confidence is elusive.
From this OECD update
So where are the dangers for investors?
One has been to ignore gold, a long running afterthought in our in-house momentum portfolios, at a steady one sixth weighting. Some afterthought!
A more dangerous mirage is fixed interest, because it has been priced for a massive set of rate cuts for far too long, and all you get is a speedy convergence back to negative real interest rates.
Indeed, for a lot of investors, service inflation, not goods, is already the pain point, and service inflation and post-tax interest rates have already converged.
Although with the internet, net interest margin for the banks is not as volatile as of old. There are no longer big pots of locked in money in current accounts. So, falling rates are not hurting bank earnings much, indeed the danger is more of elevated rates causing defaults. But is that denting profits? Not really. Banks are getting good at holding their margins.
Another dangerous deceit has been the flow into value and into emerging markets, that trend has lifted prices, has been doing so all year, but again quite slowly, while some sectors and markets, like aerospace and Latin America, have been pretty vile.
Both Value and Emerging Markets have now had an awful lot of false dawns. Those too feel like a mainly 2025 trade now.
Europe – where next?
Europe seems genuinely to be struggling. I notice credit default swaps on French debt remain elevated after Macron’s summer failures. While Germany still relies on China and the motor industry too much. Without peace in Ukraine, it will struggle, although the arrival of lower energy prices and more tariff protection against Chinese dumping, will slowly help.
We are (nearly) all protectionists now.
So? Well, what has worked, likely still works, and while October might (yet again) be seeing a leg higher, it feels hard to get too excited, until after November 5th.
Private Equity
Two other 2025 themes are private equity and competition.
Private equity is just about holding its own. Those big, expected, discount compressions are not yet happening, so conflicting market views persist. The bears who, judged by the discounts, are still winning, see overstretched balance sheets, unaffordable debt, at any likely refinancing rate and a closed IPO exit market. So, a lot of stale assets.
The latter is both a reflection of how thoroughly investors felt ripped off in the last IPO boom and the bypassing of over regulated, backward looking public stock markets. For hot stocks, in particular, capital is still easier to raise off market. You can buy into AI without buying IPO’s.
However some mid-market managers are quite happy to use trade sales instead, and those will pick up, once politics gets out of the way and interest rates get more sensible.
Some smaller tech areas, which never relied on debt, nor expected an IPO exit, are starting to look quite frisky, as recent buys have not been at such high prices and they have ridden the post COVID technology expansion well.
And tech has been moving very fast of late. So, buying debt free, post 2020 investments, as they now start to exit, can be pretty good, and decreasingly offset by the collapse of lockdown casualties.
Competition
On competition both Draghi and then Lagarde are saying loudly that competition policy in Europe, which has been seen as being by national market alone, will continue to weigh on productivity. Instead, the competition view must now be pan-European, and on that metric, for example, we have far too many telcos and banks. We now have a new EU Competition Commissioner, but also a desire for a “new approach to competition policy” clearly stated by the EU President in July.
So whatever nativist German noises there are, if Commerzbank has an Italian suitor, that deal is still possibly good for Europe. If Vodafone wants a merger in the UK (or any other) mobile market, that should be fine too. Indeed, clear evidence exists globally that low prices cripple investment in the telecom sector, and to keep investing, keep advancing, sensible returns are now needed.
Of course, that goes quite contrary to the idea of competition authorities (and regulators) as agents of social change and protectionism, but it is being said very loudly now by the ECB. This comes with clear warnings about the need for spending cuts, to get Euro budgets under control, aimed notably at France, presumably as Italy is deaf and Spain is behaving.
Yes, we have heard it before, but the clash between cheap services (but no investment, no stability) and a sensible return (with investment, and stability) is getting far clearer.
Lower inflation will at last allow the rates of basic services to rise, to give a sensible return, to create a real market.
Whistling in the Dark
Too much uncertainty, too much introspection; while the world roars by.
Expecting either Blair Mark II or Trump Mark II still feels unwise. As does the Franco-German led ostrich ensemble, burying its head in debt, not sand. And CrowdStrike highlights forgotten fragility.
Which leaves me uneasy. Markets have done very nicely since last autumn, but now feel as if they’re too dependent on delayed gratification, too relaxed about political earthquakes. I could do with more visibility, not just on who is elected, but what they do after elections.
So far this year, performance has come from the US, especially NASDAQ, which our momentum model recently sold for the first time in a year. Admittedly simply to correct an overweight, a substantive sell appears a way off, but a reminder that the ability just to buy US tech is diminishing. And markets need buyers to move up.
The market assumption seems to be the rally will broaden and move into the smaller stocks and round the globe. Possibly, certainly liquidity is plentiful, bitcoin and gold look high, a good indicator that there is excess cash about.
But the other source of cash, shifting out of term deposits and money market funds, has to now be slower, if we have replaced six US rate cuts this year with two. There really is no obvious reason not to just stay liquid, for a while. The dollar is also weaker, it has slid in fits and starts, but that also mounts up. Owning a depreciating currency is never great. It remains quite sensitive to short term rate differentials.
The global position is still inflationary, with no major developed economy addressing it’s out of control spending plans, all hiding behind each other’s failures.
Trouble comes when rational investors no longer accept out of kilter valuations, including for all three favoured assets, gold, bitcoin, US tech.
The US outlook – conflicted?
I also, I confess irrationally, do not expect either Trump or Biden in the White House next year, nor do I expect that much change down the ticket now. So, to the degree that the US market is rallying on Trump’s current resurgence, I find that dangerous too.
Polite society, and especially the UK fund manager, is caught between the social need to say Trump is evil incarnate and the reality that investors quite like the prospect. So, they concoct lists of the harm he will do, like cutting taxes, cutting regulation, boosting energy supply, enhancing security and decide that it is all terribly inflationary and so quite bad. But after that, conscience cleared, Â they amble over to their trader and buy a bit more.
This is an approach which is quite vulnerable to Biden getting turfed off the ticket. Especially with the need to then explain why the new Democrat candidate will raise taxes, reduce security, add regulation, reduce energy supplies, all of which is suddenly good for investors. An interesting pitch.
UK - Unmoved by Starmer’s Start
While in the UK, the large market indices are remarkably unmoved by Starmer’s start. At one level his King’s Speech was unremarkable. No surprises: Labour followers and unions given what they were promised, manifesto pledges kept.
Indeed, it was as if Gordon Brown and the Tories were all a bad dream, and Tony was at his desk, in 2007, working on the Queen’s Speech, which he dropped in a folder, and nailed to the back of a wardrobe door, for Keir to pick up 17 years later, change the pronouns and off we go.
How will housing engender growth?
Take housing, although how it is suddenly the engine of growth escapes me. The chances are the private sector could be the instrument to build them. But the timescale for that effort to cut prices is very long. Although the focus on land costs is good. Faster, cheaper consenting is also needed, based on where houses people want, will sell.
While the suggested mandatory targets didn’t work under Blair, they won’t work now. They just let the blame be shifted from local planners, to Whitehall mandarins. Stuffing more and more subsidised housing into new build sites, just raises prices (someone has to pay for them).
The Tories (oddly) had a viable idea: rather than identify where you can build, first identify where you can’t. But there is no sign of that scale of thinking, or speeding up the interminable appeals process.
The Commanding Heights
I assume the long-term plan is to demonstrate this old approach doesn’t work, create a crisis, then privatise something. I doubt if that weird solution will be confined to the railways, and almost certainly now to water. Just like Railtrack and British Nuclear Fuels under Blair, you legislate impossible outcomes, the private sector invariably fails, you take ownership and allow far worse outcomes (and need bigger subsidies) instead.
It also needs capital, which is being scared away from the water companies, by new harsher laws, the exact opposite of the current need.
It is as if lots of laws and smiling nicely at deep seated structural problems helps to resolve them. Here we see the old failing of opposition parties getting into power, but then wasting it fighting the last election: at least Blair, in his own right, innovated.
Stock markets simply didn’t believe the Tories and don’t believe Labour either; words alone won’t improve matters.
Although as ever because the index is so hated, that leaves some very underpriced stocks for sale.
We have no clear view of what the autumn brings, either in the US, or UK (the first Reeves budget), or Germany (although a budget has been concocted there, but seems impossible to deliver) or France, which one hopes will have sorted out a government by then at least. Macron’s current re-appointed appointee, looks highly unstable.
A lot of patches have been applied, a lot of whistling in the dark, but the money is running out. It has been for a while, but you can’t fight a war on several fronts : so, one of defence, welfare, health, or renewable energy, is not getting the funding splurge it wants.
Growth is the answer, but that, as Keynes noted, needs animal spirits. The animals look pretty caged just now, and Starmer is adding new bars to that prison.
So yes, the rate cut story holds, innovation possibly, but their heavy lifting is not supported by reforms which will help.
For our part sitting out the summer looks better.
We will resume these musings in early September. Under a new logo :
One suggested name is :
The Campden Snipe.
Thoughts, as ever, remain welcome.
In the real world, everything changes.
Sunak's Slaughter
FALLEN WALLS, FALLING VOTES
A few stats: Labour collected 9,698k votes, the Tories 6,835k, Reform 4,114k.
In vote share terms it was 34% Labour, 24% Tory, 14% Reform, 12% Lib Dem. A united right would have been ahead of Starmer on 38%. Labour dropped votes, (9,698k for Starmer against 10,269k for Corbyn), since the last general election.
What Boris did, and Sunak failed to do, was hold Reform, who did not stand in 2019 in return for some nebulous hint. Farage was scurrying off to the US, until Sunak bizarrely announced policies designed to outflank Reform. In doing so, quite apart from baffling his own party, he broadcast his fear. Once the ridiculous return of National Service was rushed out, Farage knew Sunak’s weakness and duly reversed course.
Farage is in little mood to stop, his victory speech highlighted “the building of a centre right party”. No, not hyperbole, he already holds the votes, in no small part, from demonstrating the tiresome habit of consistency.
Although it is simplistic to see Reform as right wing, it is (in so far as it has policies) populist, it won its toehold in Westminster in seats of deprivation, not just of big Tory majorities. Part of its vote was from Labour, although it poses no risk to Starmer. But the Tories, after a virulent set of campaigns to deny Farage a seat, lacked the firepower this time. Farage is in the building.
But surely a great night for the clown party and Ed Davey? He has taken the absence of policy and the primacy of performance (the wrong sort)Â to new depths. He lost votes too, getting nearly 175,000 fewer than in 2019. Ed Davey had 3,520k, against 3,696k for Jo Swinson.
WHICH TORY PARTY?
What of the Tories now? They still need Farage’s vote bank. Either they neutralise it, as Boris did, or absorb it as John Major did, or they are out of power for a decade.
That seems obvious.
What seems highly risky, but quite likely, is they just leave Reform to fester. So, the ruling cabal of centre left Cameron acolytes plough on, piling defeat upon defeat.
Across Europe these archaic centre right parties have blown up, their only preservation is the equally ancient UK electoral system, for which the Tories (24% of the vote) seem the only advocates, Labour adopted a pro-PR vote motion at their last conference, and the Lib Dems, Reform and Green votes would easily make that a majority.
It is coming at some point. In some form.
Clipped from the Labour Policy Forum Page
Do not read too much into that SNP wipeout in Scotland: in the face of the extraordinary mix of sleaze (much unproven) and a well-funded (compared to England) but disastrous NHS, the SNP vote share held up at 30%, suggesting the dream has not died.
It will probably hold on to a high number of Holyrood seats, based on PR in those elections. The sole Tory loss in Scotland, saw a messy local fight between candidate and party.
Labour now has its own issues of success; it will be unwise to treat the more rural seats they have won, as any more than loans. Like the Tory Red Wall seats, these are unstable, single term members, it is not practical to help them (as Boris showed).
While Labour have also unleashed some big beasts, most notably Rees-Mogg and Liz Truss. The Tory party would be wise to lasso both, less they graze elsewhere; their attitude towards them will be very telling.
NEXT TIME
After the last election, in early 2020, even pre-COVID, I predicted 186 seats for the Tories in 2024, none in the Red Wall.
I am inclined to repeat that.
I see this as a Lib Dem high tide. Devoid of policy or power, stripped of the virulent anti Tory votes, unable to add voters, I see them fall away. While Reform is not close to power either, but the SNP will probably be resurgent. So, Labour could easily suffer a loss of a hundred seats, down to about 310, still the largest party, but potentially needing a deal to rule.
That is the real reason for Starmer to govern from the centre. For that he might actually win votes next time.
The  extreme alternative outcomes are about the Tory/Reform issue: how the already dominant right-wing  vote is divided. As in Europe, they are now numerically strong, and the deals to stifle those voters voices’ increasingly seedy and unstable.
If the Tories spurn their right wing, it splits to Reform.
If the Tories spurn their left wing it splits to the Lib Dems.
Either split creates a third party with over 100 seats and hence a route to power.
Instead, the Tories need unity, a cap on recriminations, no triumphal ascendancy, no coups, and an end to the chaos of central office, and its hapless parachute candidates. The party needs true devolved powers to the associations – and the party must spend money on good agents. That is where they will rebuild to back over 200 seats.
Then it has a chance.
Will it take it?
Despite the noise, as we listed above, successful political parties don’t add voters, in the main, they just don’t lose them.
Otherwise, markets feel dull, and thin. Central Banks have a sparse diary. France might excite, but likely will see stalemate. The big story remains the clash of the dwarves.
Charles Gillams
Where will the cards fall ?
The half year approaches - what has happened? Two very different quarters so far. And Investment Trusts complain too much, having stuffed their boards with placeholders with minimal stakes in the shares and multiple appointments. In markets many things still depend on how the cards (and ballots) fall.
THE FIRST HALF
With current interest rates for hard currency, high yield bonds, around 6%, you would expect riskier equity markets to be giving you over 10% a year, made up of a mix of capital and dividends. That’s the bar; it is quite high just now.
Looking back a year, only Japan and America comfortably achieve that, the S&P up +24%, NASDAQ up +30%, Nikkei up +14%. Germany creeps in at +10%, neither France nor the UK do. Outside developed markets, it is largely dire, only India at +25%.
Then looking just at the first half, all of Japan and Germany’s gains came in the first quarter, so they are now sitting well off their twelve-month highs. While as we know the big three, S&P, NASDAQ and SENSEX, are now close to all-time highs, they powered through the second quarter.
So, the challenge is, do they go on up, do the markets that have fallen back, after a good first quarter, come back to life, or do some of the dogs perform?
Some major markets, Friday close and intra day
I have no great faith in the UK market, nor in a new government being much better at growth (it can hardly be worse) than the current mob. But there are cheap looking international stocks in the UK and the punishment meted out to real assets, by interest rates and shrinking bank balance sheets, might be finally ending.
While quite clearly the good middle tier stocks are easily cheap enough to lure in bidders from abroad or private equity, in some number. UK valuations are in short OK, not something you can necessarily say about the US.
The residual underperforming markets do often have a nice yield, but who cares? With bond yields high and staying high, in an appreciating currency, why take a cut in yield in order to buy equities? Plenty of time for that later.
Anyhow in most European and Emerging markets, equities seem not to be able to get out from under their own feet, endlessly tripping over their own fractured politics.
INVESTMENT TRUSTS
We are hearing a lot of moaning about Investment Trusts, which the FCA really do not like. EU law always struggled with the trust concept anyway. That the FCA has shown no interest in freeing us from those shackles is not a surprise, it seems they too would rather channel money to Nvidia than invest in the UK. Here is their Lordships’ briefing on what EU rules we might be repealing. Nothing for Investment Trusts.
I am on balance on the Trust’s side, I do think closed end structures (as they all are) allow long term decisions, while protecting daily dealing, one of Europe’s quirky hang ups. Daily dealing is fine in deep markets, but an illusion in many medium and small equity markets. With liquidity ever more narrowly focused, closed end funds seem more, not less, important, for balanced capital allocation, competition and growth.
Trusts directors should also protect investors from over mighty fund management houses, who treat closed end funds with disdain, as captive funds, with often high fees. Their greed lets in low-cost passive competitors. Instead, their permanent capital should come with an obligation to hunt down good, index beating performance.
Sadly, the FCA has perpetuated a system, where the fund management house appoints the Boards, not, in reality, the other way round. So, they are decorative, good for marketing, and highly unlikely to fire the manager. Too many are industry insiders, serving on multiple trust boards, often in sequence. Seldom do they have an investment of at least their annual pay cheque in their current Trust, and often, little investing expertise in the relevant area.
So, Investment Trust boards hardly ever sack fund managers for poor performance. David Einhorn explains the bigger issue very clearly, noting benchmark hugging over time is what investors now get. There is a clear link to poor performance and bigger discounts, and to big discounts and treating shareholders badly: One area where big certainly does not mean better.
Rather than sabotage the sector with old, irrelevant EU law, the FCA should be hunting down poor performance, and making the “independent” directors just that, including banning directors shuffling around a set of one-manager trusts.
INTEREST RATES
We have just had Powell hold US rates, saying it is all data dependent, and slightly oddly he conceded the expectation is for a pick up in inflation, on the technical grounds that the abrupt drop in inflation last year, creates base effects.
Although he rules out more hikes; you get the feeling if he had held his nerve last summer, and added a bit more, inflation could be beaten by now. Not that he wants to or can add such instability now, so he is stuck, and we with him, watching paint dry.
With no real distress there is no pressure to cut prices, service inflation remains too high, energy prices are still quite strong, so no longer giving a deflationary boost. Both the AI boom and the resulting stock price gains, encourage consumer spending and keep (in most sectors) a strong labour market.
Markets are evidently OK with that, falling rates, no recession, growing earnings, is almost ideal. Meanwhile we are all hoping that Congress will keep either of the two old men from doing anything unusually silly, and the electorate will keep Congress on a tight leash.
Quite a lot of hoping and several months still to go.
Too chilled
Markets seem far too relaxed about world elections; we suspect from ignorance. Logically if you move from certainty to uncertainty (with a range of possible outcomes) you should adjust your level of risk. India has already shown some of the volatility of the 'wait and see' approach.
Too hot?
So, we start there, where prior confidence in an enhanced majority for Modi, was well wide of the mark, he ended down 63 seats at 240; a majority is 272. Some of that chaos is the electoral system, and some of it the ban on opinion polls - although some accurate information inevitably crept out, despite restrictions, but international investors did not pay much attention to it.
So, when the exit polls announced all was well, the market rose, only to reverse hard when the real result emerged within a few hours. Although then buyers came back in, and we ended up flat.
From this website – date published : 8th June 2024.
On a call with local managers, (and the options for investment in India are wider than you might assume) clearly something had changed, one was almost pleading with the international audience not to take money out. Very little spooks other fund managers quite like being repeatedly asked to not redeem.
The Congress Party has almost doubled its seats, from 47 to 99, a strong result. The other beneficiary was the Samajwadi party, nominally socialist, with a strong presence in Uttar Pradesh, a vast Northern state. They went from 5 to 37 seats and are very much in Modi's BJP territory.
India has always had strong states, with the more populous ones often having a local ruling party, which has been around for ages. So, this is a reversion to the long term normal.
In house collage of a state by state analysis of Indian share ownership percentages
But that is what scares investors; coalitions nearly always break down. There was also damage to the Index from the Adani group of interlocking holdings (long hounded by Congress for alleged corruption).
A weaker Modi
That allied with the long-standing fears about political corruption, uncertainty of policy and no national enforcement, is an unwelcome reminder that Modi is now in his last term. Hopes that stability will follow him, rather than a swing back to the broken past, always felt optimistic.
The commonly voiced issue is that a weaker Modi will have less ability to drive structural reforms and will find it harder to resist welfare payments, and labour demands. Historically, some of these payments and concessions reach the poor, either in higher consumption or better services, but a great part gets stuck with middlemen. That should be less of a problem now, as a result of reforms already implemented, putting in a national bio identity scheme and almost universal individual banking services.
We will see.
While generally expecting strong growth to persist, we are now more cautious about signs of the lost consensus, into the medium term.
The UK - far too chilled
Which brings us to the farce that is a UK General Election, where such discourse as there is has been about whether families are or are not facing a ÂŁ2,000 tax hike (or roughly 20% more for those on average earnings). Not knowing where they live, or how they spend their money, or indeed how they will adjust to high taxes, you can never tell these things with much accuracy.
This comes with minute (and futile) attempts to list every one of the myriad ways that the assumed tax hike won't happen and extracting a "pledge" from all parties not to raise them. As if all Chancellors do not have multiple ways to raise revenue, carte blanche to create new charges, and a great ability to lie or concoct exceptional circumstances to hit us. Sunak of all people should know that.
Yet most voters are thinking, is that all? Is it enough? We know that existing service demands are not being met and that no party seeks to resist the endless demand for expanded services.
I doubt if growth will save us either: we are close to the point where those that can take investment elsewhere, have left, and no sane investor would now invest, without substantial state subsidy. So, we are simply building up to an inevitable budget crisis in the medium term.
There are a few who hope that change will be its own reward, maybe, but we can't really tell much until after the first Budget, (Labour have pledged to revert to just one a year), and a couple of Parliamentary sessions.
Just waiting and hoping is illogical. Markets do just that, though.
Frozen in the US
Which brings us finally to the USA, the Presidential election feels (to me) fairly easy to call, but how the US Congress and Senate go, does not; the resulting power (or otherwise) of the President is less easy to predict. It may be that we get a split between parties again, which markets like, and it feels unlikely (but possible) that we end up with constitutional change, which markets certainly won't like.
The current Federal Reserve Chairman will be in office for all of 2025, but almost certainly not beyond that, and who replaces him, will figure high on the consequential concerns, as unlike other Central Bankers, he sets the global tone. Powell is not popular with either of the spendthrift presidential candidates seeking office. Nor will he be trying to get reappointed. He has been an odd and erratic champion for the dollar and sound money, but he has been that.
I am not sure other elections are so consequential, the European Parliament has hopefully done its worst already, while investors in both Mexico and South Africa are starting from a low base of limited ambition.
So, to us, the question is how long to follow benign short-term themes, while such dramatic shifts may be hitting us within six months.
Inactivity from ignorance remains attractive, but is it wise? At some point in the interim, markets will probably decide not.