|
Introduction Another positive month for equity markets around the world as investors seem keen to look over the valley of the Covid-19 lock downs and towards the sunny lit uplands of the re-opening of economies. Consequently there continues to be something of a dichotomy between this performance and the numbers coming out of the economy in the short term, although as we all know the markets tend to look ahead and are a discounting mechanism. Aside from that there have been a few signs of further outbreaks which could bring on further localised shut downs and the threat of second waves etc. but again investors seem quite relaxed about that too. As ever all the liquidity provided by Central Banks around the world is no doubt helping to keep markets / investors afloat despite the on going virus / economic storm. Market Timing Indicators Regular readers will know that I have been producing these moving average based indicators for the UK Market for a while now and that they triggered as a sell at the end of March, since when the UK equity market and other equity markets around the world have staged recoveries to varying degrees with some such as the tech heavy Nasdaq Index actually achieving new all time highs. No such tech excitement in the UK and as a result the recovery in the Indices here has lagged that seen in the US in particular. As a result all the UK indices remain below their moving average trends by around 4% to 8% with the Small Cap index being the strongest and the Mid 250 the weakest or furthest below its trend. So these together with rising unemployment claims in the US still suggest that one should be out of / cautious on the markets based on these technical timing indicators, although thus far it would only have cost you from missing out on the subsequent rally that we have seen since they triggered aided and abetted by the Central Banks largess as mentioned above. Compound Income Portfolio Again regular readers may re-call that I decided to ignore the market timing indicators as I'm more of a fan of time in the market that trying to time the market. See also Terry Smith in the FT today. I also felt that it would be more useful for subscribers to see how the Scores performed over this challenging period and what stocks the portfolio ended up trading. Thus the portfolio was able to participate in and indeed enjoy a decent recovery in April and May when it recouped about 80% of its losses from March and outperformed the FTSE All Share, which I use as a benchmark, by 9.4% in the process. This recovery however came to an end in June as the portfolio returned -2% versus the +1.5% total return for the Index. This leaves the portfolio with a negative total return of 15.2% for the year to date which is some 2.3% ahead of the -17.5% total return from the FTSE All Share. This was largely explained by only a handful of stock managing a positive return and despite last months value pick, City of London Investment Group (CLIG) soaring by 20% on the back of their deal. Against this the rest of the portfolio fell and a handful of stocks by a double digit percentage. Most of this was on little or no news and therefore probably reflects a bit of selling in not so liquid stocks in the main and perhaps a dash for trash as investors try to anticipate a recovery from re-opening perhaps? In terms of this months screening there were five stocks, three expensive winners and a couple of more neglected value rated stocks which came up with Scores in or around the zone where I normally think about selling. On this occasion, given the market conditions, I decided to give most of them the benefit of the doubt for now. However, given the recovery we have seen, I did let one position go which had seen downgrades and some uncertainty to the effects of the virus on its operations. Despite this it had recovered to trade on around 30x and had a fairly low yield as they had also passed on paying their latest interim dividend. They have also been quite reliant on acquisitions to boost their growth in the past and I guess it remains to be seen if the fall out from the virus / recession makes that harder or easier for them to achieve going forwards. In place of this I added what might still be described as a relatively expensive quality play which trades on a little of 20x, but does offer a yield of over 3% which is nearly twice that of the stock it was replacing. They have recently paid an increased dividend and seem likely to again in the current year as they benefit from 78% recurring revenues and operate in a fairly defensive area which is probably benefiting from the virus in terms of new business opportunities going forwards. Any way I'll leave it there but subscribers will be able to see the stocks concerned and the other portfolio holdings in their file in the Portfolio and Transactions tabs. If you are not a subscriber then please see the Portfolio tab in the menu and the Scores tab in the menu for more details about them and how you can gain access or click the highlighted text above. Finally you can see a table of the full 5 year+ performance history here and this is presented in the graph below at the end of this post. In the meantime have a great summer where ever you are able to enjoy it if you can and good luck with the return to the new normal and whatever that turns out to be - cheers. 
0 Comments
 Market Background May saw another positive month for markets on top of the recovery seen in April. This comes as quite a relief given the nervousness that was around and as it turned out, unfounded fears of a relapse and rapid re-test of the March lows, so far. Indeed with the ongoing Central Bank support and some evidence that the worst of the virus effects may be behind us as some economies start to unlock, investors seem to be betting on a V shaped recovery. Indeed market action, in the US in particular, has stayed above the long term trend and with the S&P 500 recently recovering above its 200 day moving average it could even go onto to test recent highs potentially. (See Chart above). Within all this after early narrow breadth with the FANG technology type stock leading the way, more recently there has been something of a broadening out and even a small rotation into value stocks. This came as some pointed out that the value versus growth performance and valuation comparisons had reached extremes last seen in the dot com era, although it remains to be seen if this will be a lasting shift and indeed if the rally will last or continue. Market Timing Indicators These which are based on the trend in UK Equity markets remain in negative territory about 10% below their trend, as the FTSE UK Indices largely lagged the recovery (as usual these days it seems) in other global markets. Thus this would suggest remaining cautious or out of the market if you are trying to time it. This would be reinforced by the large spike upwards in US unemployment that we have seen which has taken that indicator above its trend. Thus even if markets should carry on rallying and turn the market indicators positive, the theory underlying this model would require the US Unemployment to come back below its trend and this seems some way off. Thus if you are in cash / market timing this would suggest that you will need nerves of steel and the patience of a saint to wait this one out while the markets continue to confound the bears and wait for them to come out of hibernation. Compound Income Scores Portfolio Having ignored the timing indicators and kept this pretty much fully invested this continued to benefit from the positive market background. Thus in May it produced a positive total return of 4.2% which leaves it with a negative return of 13.5% for the year to date. This compares to +3.4% and -18.8% for the FTSE All Share Index over the same time frames. Since inception just over 5 years ago the comparison is +75.2% v 10.6% or 11.5% per annum versus 2% per annum from the Index. Not too many trades this month as few if any of the Scores justified action and one needs to be a little cautious of most figures these days any way given that Companies are reluctant to forecast and predicting outcomes is largely guesswork educated or otherwise. I did however top slice one of the big winners in the portfolio, breaking the old adage of running your winners. This did however reflect a deterioration in its score, large driven by its valuation moving up toward the top decile as it hit new all time highs. The proceeds were reinvested into a much better value play, which remained oversold having lagged the market recovery despite being sensitive to it. This move therefore played rightly or wrongly to my natural value tendencies.  Summary & Conclusion So another positive month for markets confounding hopes and fears of a further bout of weakness to potentially re-test the March lows. This was driven by on going support from Central Banks around the world and perhaps better than expected or not as bad as feared outcomes on the Virus front as some economies started to reverse their lock downs. Consequently investors seem to have bought the dip and be anticipating a V shaped recovery and as such the longer term bullish trend still just about remains intact for now. Of course it remains to be seen if investors current expectations are realised or if something less positive comes to pass which might force a reassessment on markets. Aside from the the timing indicators for the lagging UK market still suggest that one should remain cautious but you might need to be patient to reap the benefit of that as thus far the markets seem to be remarkably chipper despite all the bad news that has been thrown at them recently. Avoiding all that angst the Compound Income Portfolio continues to, well Compound away quietly in the background, albeit in a losing fashion this year so far, but at a slower rate than the overall market. Time will tell if those loses will continue to shrink or expand again from here. To be honest I really don't know having been surprised by the robustness of the rally, but personally I still wouldn't rule out some more volatility as we go through the rest of this year and get a clearer view of the impact of the virus shut down and subsequent new normal on the economy and the Corporate sector. Whatever you do, mind how you go, stay alert and safe or whatever the latest sage advice is from the government and enjoy the hot / fine weather while it lasts. I hear that apparently there is a nice Castle in Durham which is worth a look if you fancy a drive and are feeling up to it!   Market Background After the carnage of March we had something of a relief rally in April, or as I suggested last month the reflexive rebound stage which is quite common during bear markets. As a result the FTSE All Share managed to bounce back and provide a positive total return of 4.9% for the month. This does however leave it with a negative total return of 21.5% for the year and as you can see from the chart above, the UK market has lagged the recovery in other markets around the world. Some of this lag is probably explained by the make up of the various indices with Nasdaq obviously being helped by it tech bias and the FTSE 100 in the UK being held back in the main by its heavy exposure to more vulnerable sectors like Banks & Oil. Talking of Oils and the headline on the chart about markets being detached from economic reality. I think we had a dose of that the other day as Royal Dutch Shell finally bowed to the inevitable and cut their dividend for the first time since the war. In addition results in the US from a couple of the market darlings, Apple & Amazon were somewhat underwhelming too. Thus it looks like we may have seen the best of the rally for now and we might even be into the next down leg of the bear market or again as I suggested last month the drawn-out fundamental downtrend. Indeed referring back to my FTSE ready reckoner that I shared in my recent webcast, with the Royal Dutch Shell dividend cut this week, this brings the 50% dividend cut for the market more into view and futures market is suggesting that too. This would also be in line with the worst case scenario foreseen by Link Asset Services in their Q1 2020 Dividend Monitor update. Thus the risk reward from where we were (briefly) above 6,000 on FTSE recently looks skewed to the downside I would suggest.  While it is worth remembering how bear markets pan out and there was a good reminder of that recently in a good post on the Real Investment website (see highlighted link above) that I recommended in a recent post and on Twitter. Below is their graphic on how the current one compares to the last two bear markets and the different phases discussed above.  Market Timing Indicators As for the market timing indicators, which to remind you turned negative in February and were confirmed when the US Unemployment rate and other economic indicators indicated that a recession was coming in March. Despite the rally in April these still remain some way (about 12 to 14%) below their trend moving averages suggesting that one should still be cautious of the market from here. Indeed if you feel over exposed and didn't reduce before, the recent rally has probably given you a good opportunity to adjust if you don't want to ride it out for the long term. With that in mind, on that same Real Investment Website mentioned earlier, there was a slightly alarming post about CSPA (crash statistical probability analyses) and Bull & Bear Tracker algorithms. These seem to have called the recent low and are now calling the end of the rally, as per previous bear markets. It is also making the following bold predictions:
Compound Income Portfolio Which leads me onto the Compound Income Portfolio (CIP) based on the Scores, which as discussed last month is throwing caution to the wind despite the above discussion and continuing to invest through this bear market to see how that compares with the Market timing signal. So far one month into the experiment it is 1-0 to time in the market versus timing the market, but this is likely to be a marathon rather than a sprint and an easy win for market timing if the alarming post above is to be believed. As ever time will tell on that I guess. So after March's record fall of 22.2% the CIP saw a record monthly rise or total return of 13.5% versus the 4.9% from the FTSE All Share. This meant that it had clawed its way back ahead of the FTSE All Share Year to date by 4.5%, but that just means it has produced fewer losses with -17% versus -21.5%. Since inception just over five years ago the CIP is now up 68.1% versus 7% from the FTSE All Share or 10.8% per annum versus 1.3%, which is nice. If you would like to see the full history of that in table form then click here or you can see a graph of that below.  Much of this months performance was accounted for by the unwinding of the under performance by Mid and Small Cap names, where the portfolio is overweight versus large cap names and which had driven the fall in the previous month. In addition 3 of the 4 purchases last month did pretty well with two up by over 30% and another up by over 10%. As I mentioned on the Blog during the month one of these was Jarvis (JIM) which has since reassured and then put out a trading ahead of expectations update - which I had manged to predict. So I'd say it is definitely worth focusing on individual names and see if you can see how they might come through this OK and try and avoid those that might not rather than getting too hung up on market level. Against that 2 of the 3 sales I undertook last month didn't do much but one, Games Workshop (GAW) also went up by more than 30%. So you win some you lose some I guess. This was however on the basis that they were going to start selling on line again and despite some hefty downgrades which has now left it on over 30x earnings so I'm not sure I'd be buying that up here myself now. I maybe worried too much about the operational gearing on the down side. i also just wondered if all their customers would have as much disposable income to spend on their hobby and may even think more about spending their time on more important things like family and friends after all this perhaps? Any way fair play though to those that have held on, may you escape all your Dungeons and slay all your Dragons or whatever the hell it is that their games are all about? Aside from that, as suggested last month, I did make one switch intra-month where one stock Ramsdens (RFX) had, I felt, recovered far enough and with downgrades it was now on a rather high 20x versus a more normal 10x maximum or so and it is still not operating. Now while Pawn Broking & gold trading might boom on the back of all this I felt that the FX business, which accounts for 40% of their profits, might be missing in action for longer through all this as it seem likely that foreign holidays and air travel may be slow to return, but I could be wrong as it went up another 13% since I sold it! To replace that I bought a more defensive counter in the food manufacturing sector that came up with a good Score and which was in the main (80%) still trading. This was Finsbury Foods (FIF), which hasn't done much yet since, so maybe I shouldn't bother with the intra month trading? Nevertheless it looks pretty good value to me on around 6x their likely earnings this year (June year end), although they too have withdrawn their profits guidance and latest dividend for now. I would however expect them to pay some kind of final and they should mostly be back up and running in their next financial year. It also looks pretty well invested and as a result does carry some debt, but they have confirmed that they have enough financial flexibility as things stand so shouldn't need to issue shares etc. Now it is not the highest quality operation but as I say it should be fairly defensive (bread and cakes to food retailers 80% and 20% food service) and as such I could see it re-rating back towards its more normal 10x or so and therefore I'd look for it to recover towards 80p to 100p levels from where it has come recently for a potentially decent return of 33 to 66%, although again I could be wrong. In terms of the Monthly Screening a couple of semi-operative retailers came up as natural sales. One had not been as defensive as I'd hoped (although I didn't expect retailers to get shut down) and although it's not the highest quality, it is at least very financially robust so I was in two minds, but nevertheless let it go given the uncertainty surrounding when and how retailing might return. The other one had recovered more and is more exposed indirectly to housing activity and is more discretionary in nature in terms of the spend. So given the portfolio has a few names that are either directly or indirectly exposed to housing demand, which I think may well be weak going forward - I sold that one too. Against those I purchased a couple of Companies in different industries that are still operating and which are in the main not that badly affected by the Global Virus Crisis. Any way subscribers to the Scores will be able to see the detail of these and all the other transactions in their Scores sheets and be able to follow the success or otherwise of these. If you would like to join them for less than the price of a cup of coffee per week then click here to find out and sign up for access if that is of any interest to you. Summary & Conclusion Well we are certainly living through unprecedented times as everyone keeps saying. As a result we have seen unprecedented falls and rises in share prices in the last two months and May has already started with a down draught. Thus I won't be getting carried away with the bounce back in the market or the CI Portfolio this month. This is because based on my experience and prior bear markets we are probably in or have just gone through the reflexive rebound rally stage. We may already be in or may soon enter the drawn out fundamental downturn stage. The market timing indicators that I follow also suggest that it is too early to turn bullish too. While an article about some algorithms is also suggesting another down leg starting about now and being done potentially in double quick time again, which would at least tie in with the first two phases of the Global Virus Crash (GVC) a term I'm looking to coin after the GFC last time. Beyond that, if it comes to pass, we might then get a longer drawn out bottoming & recovery phase which could also include some sharp rallies along the way. One other depressing thing that has occurred to me is that west seems to be following Japan, but with about a 10 year delay, although I know this is not an original thought. So as the Japanese market is still below its bubble highs after 30 years, it is depressing to think that on that basis the FTSE might still be below 7,000 in another 10 years time. Having said all that there are always opportunities for stock picking even in a bear market or sideways trading pattern, you just need to be active and nimble to take advantage of them, although I'm doubtful of any ones ability to perfectly time the market but I'm sure there are some exceptions out there who can claim to disprove that. Consequently I'm keeping the CI Portfolio pretty much fully invested throughout while trying to pick my way through the fall out from the GVC by trying to gravitate towards stocks that might benefit from it like Jarvis (JIM) last month and one of this months purchases. Consequently it will hopefully be interesting to see how this plays out against the on going bear market and whenever the timing indicators / economic indicators suggest that it is safe to go back in the market. As I like to say, I guess time will tell on that. Talking of which thank you for taking the time to get this far and if you have as a reward or punishment (depending on your view of my musical taste) I'll leave you this month with a few more music tracks. Take care, stay safe and take your time in investing your cash I'd say if you have any to invest and good luck when you do! Just a quick update post my recent webinar and post about the Crash & Timing Indicators etc. In that post, given that I was ignoring the timing indicator sell signal I said: "I'll also reserve the right to perhaps make some intra-month changes rather than the usual monthly screening given the market conditions. " With that in mind I have made one sale today of a stock at the smaller end of the market cap scale which is not currently in business and has had a decent rally off of its lows, although still sadly down a long way from its highs. Subscribers will be able to see the details of this when the sheet is updated after the close tonight so I can't give any more details here. I will keep the proceeds in cash for now which will take the portfolio up towards a 4% cash balance. The reason for this is I feel that the rally has now possibly extended as far as it is likely to in the short term, although as ever I could be wrong on that. What did give me more confidence in this call is not only the history which I covered in the webinar but this excellent recent post from a guy called Sven Henrich called Just one chart. This is well worth a read in my opinion and you can follow him on Twitter. I'll leave you with just one chart from his post.   Market Background I won't spend long on this part, probably best described in one word - carnage. So rather than getting bogged down in reporting % moves in markets etc. I'll try and discuss some of the bigger picture features and venture some opinions / guesses as to what might come next. I will however quote some figures for you in the Portfolio review section later on what was one of the worst quarters on record, just so you don't feel hard done by. If you are in a hurry then skip to the end where I've done a bullet point summary, but I'd encourage you to read the full post if you can possibly spare the time. Market Timing Indicators As for the UK Market Timing indicators which I have been producing / following for a while now these have obviously all gone heavily negative and indeed the most negative since I started compiling them back in 2014. They are all between 19% (FTSE) and 22.6% (Mid 250) below their trends at the end of March 2020, so we will need to see quite some recovery before these turn positive again. As such on their own they signal that you should be reducing risk / be out of the market. Regular readers or those with good memories may recall that I have also been tracking these along with economic indicators which might signal a recession ahead. As the original research that prompted me to start producing these suggested this was the best way to improve the signal and avoid whipsaws from dips below the trend which get reversed. As of the end of March these economic indicators had not triggered. These will though as of Friday 3rd of April when some horrendous Non Farm Payroll numbers are expected to be announced and the US Unemployment rate will blast upwards. In addition Manufacturing PMI's have come down below 50 in March and are expected to fall further in April too. Thus with recession signals triggering the model would suggest this is the time to go defensive, sell everything and switch into treasury bills or cash. This was shown to improve on buy & hold returns and market timing based on the trend without the economic triggers by avoiding the whipsaws. You can see my original post about this here & the authors original post - In Search of the Perfect Recession Indicator. The slightly unfortunate thing in this case is that this has been such an unprecedented event that the market has already crashed in record time and was already down by around 30% or more before the recent rally left the FTSE All Share with a negative total return of -25.13% for the quarter. Given the last two proper bear markets accompanied by recessions led to 50% or so declines I guess this one could only be half way down, so maybe it is not such a daft idea if you have a small portfolio and can be nimble enough to sell up and get back in. Outlook For Dividends What we do know is that the shut down of many economies around the world is unprecedented and many forecasters / economists (for what they are worth) are speculating that the economic downturn / recession will be worse than that endured during the Global Financial (GFC) in 2008/9 and some are suggesting that unemployment could spike up to levels last seen in the Great Depression. The knock on effect of that and Companies inability to forecast in the short term is that dividend cuts and suspensions / deferrals have come through much more quickly and to a greater extent than seen back then. Indeed on the subject of dividends looking at the Link Asset Service Dividend Monitor this showed that dividends in the UK only fell by around 13% in 2009 to £54bn in total before stabilising in 2010. Since then they had doubled to £110bn, although Link did think they would have fallen back to about £103bn. This time around apparently dividend forward contracts in the derivative markets are indicating cuts of at least 30% and up to 50% in Europe. While there was a good piece from John Kingham looking at a long history of this in the US which suggested that the combined dividend of the 500 largest US companies has decline, multiple times, by more than 20% to more than 50% over the last century. The 50% falls came after wars and around the great depression. So since current unprecedented conditions have been likened to a war and raise the outside possibility of a deflationary depression, as he says income investors should prepare for the worst and assume that dividend income form the markets might get cut in half this year. Which if it comes to pass would take overall UK dividend back to where they started in 2009. One would however expect that they would then stabilise and potentially bounce back quite strongly thereafter next year as hopefully normal service is gradually resumed in the second half of this year. Of course individual experiences will differ depending on the make up of your portfolio and may be better or worse than this. Compound Income Portfolio (CIP) Which brings me nicely onto this and what has happened to it this quarter and what my plans for it are going forward from here. As this is also the fifth anniversary of the Portfolio being launched I had hoped that this would have been a good time to highlight the longer term performance but sadly I guess no one will be that bothered now, but more on that later. After the first two months this year the portfolio was holding up well having been up slightly in January when the market was down and was over 6% ahead of the index by being down less in February too. That trend came to an end in March as many Mid Cap and Smaller Companies, which the portfolio has a greater exposure to than the broader index, played catch up and fell heavily. In addition one or two position which were more sensitive to shut downs of activity in the short term also fell more heavily. Thus the portfolio recorded its worst ever monthly fall of -22.16% compared to the -15.07% from the FTSE All Share. Year to date this leave the CIP with a -26.83% total return and therefore -1.7% behind the return from the FTSE All Share (which I use as a benchmark) quoted earlier. Which is all very disappointing but not that surprising in the circumstances. So what about the longer term and the 5 year returns, which are quite frankly more relevant and a decent time frame over which to judge whether a portfolio based on and selected from the Compound Income Scores has any merit. Well the picture as shown in the graph at the very end of this piece is not too bad even if I say so myself. This is because the CIS has still returned 48.1% over that time frame or 8.2% per annum versus 1.9% or 0.4% per annum from the FTSE All Share, so I must be doing something right or I was very lucky or somewhere in between I guess. Out of academic interest I decided to check how this compared with other UK funds that had been available over the last 5 years both of an open ended and closed end or investment trust variety. On checking I noted that the top UK Equity Income OEIC was Trojan Income with a total return of just 12.5%. While in the All Companies Sector out of 250 funds there were just 4 funds which bettered this return which were MFM Bowland +77.9%, Chelverton UK Equity Growth +75.9%, CFP SDL UK Buffetology +60.4% and Slater Recovery +48.7%, with figures taken from Trust net. So they might be worthy of further investigation if you want to go down the fund route or they might be about to blow up if the past is no guide to future as the marketing blurb says? I did notice a few names that the CIP has in common with these so they are probably fishing in similar waters to a certain extent and probably structuring their portfolios completely differently from the index rather than the closet indexing that still tends to go on in mainstream investment houses. As far as Investment Trusts went I was somewhat surprised to find there were hardly any UK Trusts that had done better over the last 5 years. I say surprised as my perception is that Investment Trusts tend to do better thanks to their closed end nature and maybe lower charges, plus the benefits of gearing. Having said that I guess any gearing may well have been a hindrance rather than a help given the now low returns over the last 5 years unless they managed that very actively and well. In fact the only one that I could find that had done better on a NAV total return basis was a small cap fund - Standard Life Smaller Co.s - which returned 52.6% according to figures from JP Morgan Cazenove, although AIC figures are also available. The only other fund that came close was from the much trumpeted Nick Train and his Finsbury Growth & income which returned 42.1% and he certainly falls into the category of doing things differently too. As to the income funds they were all surprisingly poor too, but the one that is probably closest to what I'm doing in terms of the make up of the portfolio is probably Gervais William's Diverse Income Trust which has returned 11.1%. Other than that Troy Income & Growth cropped up again with +17.7%. While a quick look at the Stockopedia guru screens showed only the Geraldine Weiss & Dividend Achievers delivering anything much with 16% & 12% respectively, which if you add in dividends might be around 36% and 32% so close to the CIS, but no cigar! So maybe the Compound Income Scores are a Guru screen you've never heard of! For the sake of completeness of all their Guru screens Jim Slater, Peter Lynch, Price Momentum & James O'Shaughnessy Tiny Titans did better so they may be worth investigating if you're a Stockopedia subscriber. If not you can get a two week free trial here. So I am quite happy with all that but not getting too smug or carried away given we are going through an unprecedented event and nobody really knows what will transpire. Nevertheless once Companies feel able to forecast again and things start to get back to normal I'm reasonably confident that the Compound income Scores will continue to be a decent guide as to where to look for good quality companies which should be able to grow their dividends and thereby provide decent returns over time. With that in mind and thinking about the Market Timing Indicators mentioned earlier I have come to the following decision. Since I am sceptical of market timing and I would like to see how the Scores perform during a downturn, I have decided to keep the Portfolio going and remain pretty fully invested. This will also enable subscribers to see which stocks I pick during this next phase rather than just stopping. Thereby I'll be aiming to benefit from time in the market rather than timing the market and not have to stress out about trying to time the bottom and when to re-enter. Against that I'll continue to produce the market timing indicators and the follow the economic signals to determine when it would have otherwise re-entered and see what the difference is in terms of the valuation at that time versus what it was at the end of March 2020. So I'll highlight this months valuation in the table, although I think March 2020 maybe seared on our memories any way. At least it will be a useful real time test of the efficacy of using the timing indicators in this way in these circumstances and the Scores during a downturn. Personally I suspect things could still get worse in the economy and markets from here as markets have usually had their worst losses in bear markets when they are accompanied by a recession, which seems likely on the back of this. Indeed some commentators who I hold in high regard suggest that fundamental value and therefore better long term returns may not be reached until the S&P 500 get down into the 1700 to 2000 range versus recent levels of around 2500 after the sell off and rebound. In the UK I suspect we could end up with FTSE trading somewhere in the 4000 to 5000 range before we see the low, but don't take that as gospel just my gut feeling based on past downturns. Against that there has been a massive response from Governments and Central Banks as expected and this might well help to offset the worst of the hit from the Corona shut down. Nevertheless I'd be surprised if we didn't see at least a re-test of the recent lows just under 5,000. It is however worth remembering that it is a market of stocks and all this volatility will likely throw up some decent opportunities along the way in individual stocks. Indeed I have made a couple of successful acquiistions of stock myself through the recent sell off. With that in mind I made a few changes to the Portfolio this month with three stocks that had seen falling Scores and which i think will be vulnerable to the current and future conditions exiting the portfolio. These were replaced with four new stocks, all of which are still running their operations. Three have cash rich balance sheets and could potentially benefit from the turmoil. Subscribers can see the details of these trades and brief rationale for them on the Transactions section of the Scores sheet. I'll also reserve the right to perhaps make some intra-month changes rather than the usual monthly screening given the market conditions. Summary
Conclusion Firstly thank you if you have got this far as these are extraordinary / unprecedented times & I sincerely hope you and yours are keeping safe and well through all this even if your portfolio may not be. I have to say I wasn't and i don't think anyone else was expecting this, although clearly there had been some on going concerns about valuations in the US prior to this. So maybe the virus was just the pin that the market had been waiting for? Of course how economies and markets come through this remains to be seen, will we see a V shaped recovery or will it be a more protracted affair given the economic damage done by all the shut downs? All we do know is that dividends have fallen in the short term in an unprecedented fashion, although I'm hopeful that they will stabilise and bounce back at some point later in the year. Markets will discount this and bottom out at some point and given all the support offered by governments and Central Banks this may come sooner rather than later, but as is often said: “Bear markets have three stages —sharp down, reflexive rebound and a drawn-out fundamental downtrend.” As it looks like we have entered a bear market I would therefore at least expect a re-test of the recent lows. Indeed a good US commentator that I follow thinks 2300 on S&P 500 may be fair value based on median PE's, but we often see an overshoot so 1700 to 2000 is his suggested Zone for getting more positive and reinvesting etc. This would tie in with my thoughts in the UK that the 5000 low or thereabouts may well get re-tested and better opportunities may present themselves in the 4000-5000 range. As ever though it is a market of stocks and rather than focus on headline indices time is probably better spent focusing on individual stock threats and opportunities as we go forwards from here. We may well be in for a bad and possibly even a deflationary recession in the short term. Beyond that with all the money printing etc. one would probably expect inflation to become more of a problem this time around down the line. This would still suggest that Equities & real assets will be the place to be for the long term. Personal Note It sometimes feels like I'm the only person in the Country who has not had their daily routine disrupted by all this as I've been "working" from home and self isolating for 11 years before this any way! So absolutely no change to my daily routine with the markets still being open and all, apart from not being able to go out for shopping, dining, leisure and entertainment when I want. Routine is important if you are new to this, perhaps I'll try and do a blog about that. As for my portfolio and what I'm doing personally. Well to coin the old phrase I'm keeping calm and carrying on investing. Yes my portfolio and net worth has taken a big hit, but then they went up a lot prior to this so I'm OK with that as I always say you have to take the rough with the smooth. At times like these it is more important to avoid losers and losing too much. While it may be a bit late for that now it is always worth re-assessing and adapting as events unfold as far as you can, Indeed I'm glad I did a bit of that last month as the crisis started to hit and sold a few stocks which seemed more vulnerable to all this. In reality though I was never going to be willing or able to sell everything and I wouldn't want to. Who know maybe I'll come to regret those words when this is all over with? As I mentioned in the previous update I came into this fairly well placed having moved more defensive and reduced cyclicals. On top of this I had built up substantial cash reserves. So even if some of my day to day income portfolio stocks end up cutting their dividends I'm sure I'll survive even with no bailout, government loan or furlough payments (can I get those for my Butler and House maid I wonder - no only joking). Any way I guess that's the point of / beauty of financial independence. Meanwhile I'm still investing our ISA's for the long term but sitting on a bit of cash in those too pending forthcoming opportunities and about to top them up with this years allowance next week too. Any way at the end of the day its only money, as ever health, family, friends and your local community should be more important. Here's to hoping we all pull through and as the song says....  |
Archives
April 2020
Categories
All
|
||
RSS Feed
