TEARS OF A CLOWN
An eventful week, the triumph of Trump and the debasement of Starmer, both heralding fiscal expansion based on higher borrowing; the market likes one, not so hot on the other. And how does all this extra spending emerge in the UK retail sector?
Reeves could have been crying about anything, but the optics looked terrible, in the familiar role of a Chancellor undermined by her own leader, for doing the right thing.
Even the IMF have noticed that policymaking via the OBR is bad news.
Like the previous Tory newbies, the big one term mass of Labour MPs has little party or national loyalty: theirs is a purely extractive stance, of what they and their constituents can loot from the Treasury.
Starmer was greeted as order after chaos, but is just a continuation of the mess. He is the clown, as the aptly named Miracles sang with Smokey Robinson just before 1968, his stance is âonly there trying to fool the public.â
Fool me onceâŠ..
DO MARKETS CARE?
What do either mean for markets? Well equity markets like growth, real or artificial. To them whether wealth is being created, or borrowings are allowing the acceleration of consumption, matters little. So, both in the UK and US, that borrowings are rising far too fast, matters little for equities.
Bond markets are far less happy, but they are also still enjoying unusually high interest rates, at least by recent standards.
The whole package is being offset against a multi-year interest rate decline, as the COVID inflation peak slides further into history.
I have also always found a cheap currency is a nice extra cushion for any investor. Is the dollar cheap? Does it get cheaper? Possibly âyesâ to both. But why, is the more worrying question.
Although perhaps less puzzling, sterling strength is also odd. However, against the Euro it is looking sickly once again. It never recovered from Gordon Brownâs folly, although the Tory party was rebuilding it nicely up to BrexitâŠ.
IS ALL LOST?
As for Reeves, all this fiscal laxity, sheâs been splashing the cash for a year now, has to turn up in consumption and growth at some point, despite the high (but falling) savings rate.
âHousehold Saving Rate in the United Kingdom decreased to 10.90 percent in the first quarter of 2025 from 12 percent in the fourth quarter of 2024. Personal Savings in the United Kingdom averaged 7.77 percent from 1955 until 2025, reaching an all time high of 27.50 percent in the second quarter of 2020. source: Office for National Statisticsâ
Image and summary above in italics were clipped from this website
There is extra growth to be found there. I also sense the private sector, at least, is running pretty well now, adapting to change, cutting labour, de-gearing, putting the transient ill-effects of COVID well behind it.
So, the disaster is on the tax front, and the damage caused by out-of-control welfare spend.
The worry is that like the Tories before them, they are not remotely in control of those forces.
Will Reeves last? It is a heck of a sell signal if she does not. Will Starmer last? Not if he ditches her.
JUST WHEN YOU FELT SAFE
So, all is fine? No, not really, as those pesky tariffs are still largely unresolved and I sense in several cases, both sides still want a fight. Trump probably will take something, if he can sell it to the Rust Belt voter. But the assumption that he is always weak and seeking to cave, seems a tad dangerous.
I expect more chaos.
But a largely indifferent US market response.
GROUNDED
What is happening in the UK retail world?
I have been wading through some annual accounts. The big trends are the post COVID boom and the implications for space and shopping patterns. The race to online has not fully played out, but it certainly has slowed dramatically. Both M&S and J. Sainsbury claim to have done well in that time, the former seeing sales rise 50% overall, including a 75% jump in non-food, which looked to be in terminal decline at one point.
Although it still remains half the size of the stagnant Sainsbury.
Focused professional management has come in, driven from the top. A lot of the ânice toâ stuff has gone, old-style full-service retailing is for the birds now.
Supply chains that felt knitted together randomly, are now boldly strategic, with far more automation. While store locations and numbers plunged, the estates were reconfigured. Balance sheets now look solid, dividends recommenced or stabilised.
The lease side has changed, the REITs for a long time had the whip hand, no longer. I have been looking at both British Land and NewRiver accounts. While some REITs just had their retail estates slaughtered by creditors, others like British Land, while moving away from the mega centres (even Meadowhall has gone) have doubled down on retail parks. Why? Yield it seems, dividends are stretched, NAV in offices just fades away and donât ask about development profits.
In the end, do I believe in this surprising renaissance?
Not really, although some of the basket cases are now online, ASOS and Ocado, one-time market darlings, now have graphs that pay tribute to Disneyland, with fantastic towers, toppling to empty moats.
Retail is deserving of a lowly rating and still vulnerable, like all property, to an avaricious state.
MOVING ON
A final note, after five years in active fund management, I have moved on, disheartened by the terrible rigidity of the UK regulatorsâ rules, designed to rip off and confuse UK investors, which have so effectively destroyed the UK equity markets.
And it has to be said, rather attracted by the lure of momentum trading, less work, higher returns.
Running both together has been an excellent test bed.
Black Headed Bunting
Flags should be flying, the COVID cycle is over (says Lagarde) rates are falling, currency wars are afoot.
Ignore the noise, watch the graphs.
But somehow gloom pervades.
Truly a black topped bunting.
MIXED MARKETS
Markets are designed to confuse and a lot of that is happening, with the worst of recent gloom a way back now. In developed markets it was April, after which the value rally got going, very much with falling rates. And they are falling - seven cuts (or was it Trumpâs nine?) in Europe. Less than a year ago rates were at 3.75% and are now almost halved to 2%. Thereâs a rising currency, giving an urgency to cut fast enough to stop the damage from competitive devaluations.
India also did a surprise double cut (so 0.5%) this week.
LatAm is behaving oddly, it has been a top market, year to date, but largely because it hit a low at the turn of the year; year on year it is not up. Brazil is almost in lockdown with rising rates (14.75%), and no surprise, a year-on-year market fall. Mexico is well into rate cutting, at 8.5% from a post COVID high of 11.25%. That market is up 17% this year.
Another year-on-year top performer is the Hang Seng, up 28%. Why is that?
Aubrey Capital kindly hosted an Emerging Markets conference in the City this week. A speaker noted that as China and Russia now avoid the USD, many traders are ending up with, or need access to, a non-convertible currency.
The PRC therefore apparently facilitates global gold exchanges, as a substitute, in three new offshore hubs (as well as Shanghai). This is perhaps helping to ramp the gold price.
But that has physical limitations. However, China also has a convertible currency, in the Hong Kong Dollar.
If that gets used more, demand for it also rises.
The actual twelve-month top performer is the DAX in Germany, up 29%. But just across the Rhine, the CAC 40 has fallen over a year. If nothing else, easy terms like Emerging Markets, Developed Far East, LatAm and even Europe, are hiding some very mixed performances.
MISTS CLEARING
But the common theme does look like rate cuts, and thatâs a cause for optimism. The UK now needs to be very careful that Labourâs fiscal ineptitude is not forcing rates to stay materially higher than in Europe, (still at 4.25%). Â As a result, sterling is strong and in danger of getting stronger, helping inflation, but hurting growth. UK exporters are getting kicked enough already.
It hurts housebuilders too.
Compiled from the ECBâs recent publications
The UK market rally feels a lot about beaten up, high yielding stock, sensing some relief is inevitable, regardless of the Bank of Englandâs posture on inflation.
The strength in UK banks (a big part of that outperformance) is partly their attractive yields (as rates fall) but partly the belief that as rates stay high and weak demand persists, surplus capital allows them to buy back shares and reduce deposit rates, both of which the sector has been quite aggressive about. Thatâs nice, for banks, but it is a Goldilocks position, either rates now fall, or bad debts rise.
For all those caveats the Europe, Value and Emerging Markets rallies are real. And if rate cuts go on, we expect these to persist. Along with this, at some point, a currency reversal when the Federal Reserve finally moves.
Our work still does not suggest an outflow of funds from the US, just as it does not suggest a recession or pull back. None of which makes much sense, given the weaker dollar this year. Although it may simply show a reduced inflow rate into the US.
So, is something moving, that we canât see? Â Rising long rates are giving the same signal, of assets unexpectedly moving, out of fixed interest.
While I expect political chaos under Trump, amplified by an obsessed UK media, I do wish for some days of calm; could he not play more golf?
Some of us take no notice, of course.
OFFENSIVE FUNDING
Back in the UK, the defence review - a helpful two-page summary is available here; sounds like something for everyone. (If the Tory party had the intellectual depth to suggest this, both the profligacy and militarism would have raised Cain). But it is all (as ever) fabrication, there are no available funds, even though the serious work of building inventory, finally starts.
We are promised six new energetics factories, which sounds like a modish protein bar, but just means lethal explosives. It is the logical move, but only accountants can deliver it. Year to year accounting means we must accept (and hope) that 80% of the energetic output will be made, stored, and then destroyed, at a vast annual cost. This stuff does not keep well.
I have yet to find a minister that can allow that annual profligacy. Creative accounting is needed.
I also canât see how this hybrid Truss/Reeves can borrow (and tax) another 3% of GDP for defence. She has already rewritten the rules to add billions of spend, loaded the tax burden on companies, and now like Trump, wants to spend her way out of debt.
It simply wonât work.
KURD YOUR ENTHUSIASM
We noted last week (along with a speculation on tariffs, a mugâs game, I realise) how Turkey is surviving unconventional economics. It does sit in the Emerging Markets universe, and is owned in emerging EMEA funds.
Notably, while for some of those countries, the holdings are dominated by banks, for Turkey, it is all real manufacturing, distributing and retailing outfits that attract investment. The odd impact of high inflation.
Although much more tourism will put out more buntings, including those gracing the ruins at Kars.
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. Thatâs 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 Germanyâs 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 Lordshipsâ briefing on what EU rules we might be repealing. Nothing for Investment Trusts.
I am on balance on the Trustâs side, I do think closed end structures (as they all are) allow long term decisions, while protecting daily dealing, one of Europeâs 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 âindependentâ 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.
DREAMERS
What would Trumpâs high tariff isolationist world look like? What would the mirror image be in Xiâs China? Not now, not next week, but rolling into the next decade.
And whatever portfolio theory says, and whatever the optimistic investor believes, 80% of my own portfolio is flotsam, drifting up and down on Pacific tides. Stocks I both like and which have compounded over decades are remarkably few. Oh, and a brief word on African housing.
GOING IT ALONE
But first, to give it the grand name, autarchy, or self-sufficiency. A bit of a joke - the Soviet Union tried it, Iran tries it, China famously only revived after ditching it.
But it is back in fashion, and not just in strange places. The EU industrial and agricultural policy is starting to look like a version; beyond their four walls they need carbon and chemicals, but within them they donât, nor will they allow imports of them (or products including them). Quite fantastic.
Trump is on his 60% tariffs line. Xi clearly wants to cut off foreign capital, as it arrives infected with democracy and transparency, and the associated foreign reporting or verification.
So, could they? Yes, the US could - it is big enough, can do most things, and largely trades internally. While at least in Trumpâs imagination the commercial borders are sealed, and so enforceable.
What goes wrong? Well at some, quite distant, point people stop expecting to trade with the US. So, at its most extreme, if China canât sell to the US, it wonât buy from them either. But that is decades away, most Chinese production can probably take a 300% tariff, and still sell at a profit.
The flip side of the tariff is the huge salary for a barista, or a trucker. The latter is not so far away. Prices of domestic US production must rise, to allow the blue-collar Mid-West to rejuvenate. US consumers of course (including that barista) will pay vastly more for US goods, or will get hit with the import tariff; this of course is a tax on them.
What about Xi? Well again it is possible - thatâs how China ran for much of his life, with a lot of new infrastructure, industrialization, since installed. He can do it all again. There, unlike in the US, the issue is capital. As a big net exporter, an area that will itself be under pressure, money will be harder to find; it already is.
THE NIGHTMARE
Countries that go through this closing cycle typically also do default (as the Soviets did, as US (and UK) railways did,). Folly, but it can be done.
The US has been going down this route since Obama, Trump talked a lot about it, but Biden too sees the resulting wage inflation as a good thing. So, it is the next US Presidentâs policy either way.
Obama was keen on hitting capital markets (FATCA was and remains both a non-tariff barrier (I am being polite here) and a tariff on external capital) and I suspect a Biden administration must do the same, to balance the books.
While Xi never really left protectionism, WTO and GATT were mainly honoured in the breach.
And Europe? There is quite a strong strategic need to expand to the East, although as that goes through (and we are talking the mid 2030âs here) Ukrainian farmers, like Polish farmers today, will buckle under the rules; it barely matters about the Donbas, the EU will shut those heavy industries down too.
So, I think autarchy can work for all three, it will support a large uncompetitive labour force, and consumer choice will vanish. In many cases there will be lower quality and high prices. All three will attack (or in some cases keep attacking) capital flows.
And in the end, the entrepots will survive, those not in any such block, like the UAE or Singapore today, Amsterdam in the 17th Century, Yemen under the Romans and Victorian Britain.
The winners will be flexible, a tad amoral, assertive, in fluid alliances, but reliant on gold not steel to survive. And they will suck in entrepreneurial talent too. At a strategic level, that feels the place to be looking. Although buying uncompetitive heavy industries before their brief period of tariff induced profitability, has a short-term allure.
DOGS OR GREYHOUNDS ?
The ludicrous halving of CGT allowances, based on some fantasy âyieldâ number from the equally ludicrous HMRC, via the OBR, means once again the tiresome process of harvesting losses is upon us. No longer can they sit unloved at the back, snoozing; out they must come.
And what a tale of dross they reveal, and scattered amongst them so many once âgood ideasâ and busted yield stocks. Well, it sticks in the throat, but perhaps sticking it in a US wonder stock for six months is better?
Of course, if I knew when I acquired them that the FTSE was moribund for two decades, I would never have bothered. Seems it is time to simplify.
COLLATERAL
And lastly African housing. It was one of Gordon Brownâs (and the PRAâs) great achievements to get UK banks out of overseas assets, far too volatile, currency? foreigners?- Who needs them? Bring it all home and inflate the UK housing market with safe, cheap, mortgages.
So, Citizens went, Barclays were hounded out of South Africa, and so on â although their post-sale performance has really not been great either. Africa now just does not have proper mortgage financing for the vast bulk of the population. This is at a level I had failed to fully comprehend.
You think that despite everything, Africa must have got better. But no housing, so less health, less stability, no financial security. Safe recycling of profits in the continent is still hard. Aid canât create institutional reform, but thatâs the need.
If you look for the breakout into developed status, it starts there.
All mimsy were the âborrowgovesâ
Away from all the shenanigans with base rates and currencies, earnings seem to be showing a pattern. We look at the possibility of an unshackled NatWest and Indiaâs renaissance after the Hindenburg disaster.
START OF EARNINGS SEASON
In so far as reported earnings have a pattern, it reflects the actual position, not the fears of a hidebound analyst community imprisoned by useless economic models. Statistics are not predictive.
There is no recession, whatever all those clever models predicted, never could be one with the extreme fiscal stimulus (quite unlike the private sector fuelled inflationary blow outs of previous downturns), high employment and plenty of liquidity. So, real life earnings are in a purple patch, high and in cases rising demand, with falling or stable costs.
Meanwhile wage costs are perhaps stabilising and the labour supply position seems less frenetic.
In-house graph from published UK Government statistics – real time statistics
But dividends are generally ticking up, a nice bonus to collect when interest rates do start to fall next year, and valuations based on yields look low again.
FLAVEL OF THE MONTH
Nat West really is a sorry tale. The government stupidly sold off the crown jewels at give-away prices, and it now seems to be clinging on to the chaff for no good reason. The dead hand of the state permeates the place, and given the huge interest being paid on the vast national debt, surely a sale of all the government holding is long overdue.
You read the voluminous annual accounts and somewhere about page 180 the PR guff gives way to the reality of declining business lending, a worsening net promoter score and that ultimate civil service fudge, of combining two corporate departments to obfuscate.
Does NatWest actually dislike its customers?
I speak from experience – NatWest seems to dislike small business: we moved the last of our corporate accounts from there this year. Why? In striking contrast to the PR flim-flam that dominates the annual accounts, it seems that making life easy for us, is nowhere on their agenda.
At some point, it was just easier to go than fight – somewhere around the twentieth demand for the same details, and the endless Orwellian (âdoes not agree with other dataâ), even after the written confirmation that they were now content; so we quit. Always there was that threat to close the account, but not release our funds, for some arcane procedural reason.
I found the bloated pay packet for the CEO (and CFO) pretty hard to swallow for that performance. It just seems that they donât attract good staff, and like the slow pacing of caged animals wearing their lives away, those that remain pick away at the residue of their customers.
As for valuation? Nat West would still be cheap, but I felt if it broke above ÂŁ3.00 (as it did earlier this year) again, on present form – thatâs not a terrible exit.
Letâs hope this starts a basic rethink and some real value creation.
RISING IN THE EAST
We noted when the Hindenburg short-selling started in India, and we doubted that it was much more than a clever speculator, despite the sad sight of the neo-colonial British press (and a few Americans) lining up to say âI told you soâ.
Fridayâs FT was discussing India and still called it âlow-growth⊠dependent on commodities⊠hampered by political dysfunction and corruptionâ. Extraordinary – stale, lazy, stereotypical.
The reality is as we predicted: after a pause while stock markets looked for a systemic problem, and the short sellers booked their profits, the Indian market strode on to a new height.
From Tradingeconomics
Not that the biased UK financial press would ever mention that story. Far from the mud hut image they seemingly seek to portray, plenty of IPO (and deal making activity) is showing that India, not Europe is becoming the true challenger in high tech.
The SENSEX started this century at 5,209, the FTSE 100 started at 6,540. The FTSE 100 has made it to 7,694, and the SENSEX? It has powered past to 66,160. One is up some 18% in 23 years, (not enough to even cover advisor and custody costs), the other 1250% in the same time.
No sensible portfolio can have omitted India this century, but the UK press will have worked hard to ensure most UK ones still do.
Well, thatâs the half year done, we will resume on the 10th September, expecting markets to be drifting sideways, but that gives plenty of time for the traditional summer bursts of excess or despair.
Although if it is performance you want, getting the big moves right, and the right markets, is far superior to the timing of most individual stocks.