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.
Further to my last update I felt it would be remiss of me if I didn't provide another update, as somewhat unexpectedly City Of London Group (CLIG) have entered into a merger with a similar US outfit today. I say unexpected because they have not made a habit of this, although apparently they have been open to the idea and also a bit surprising that it didn't come with their year end trading update perhaps?
Any way it comes as part of a trend of Asset managers merging to cut costs etc. as they struggle against the rising tide of passive investment management. In this case it is not so much about cost cutting and more about putting together two similar businesses in terms of the way some of their portfolios are managed to include closed end funds, but brings diversification in terms of client type and geography and thereby will help to dilute their current bias towards more volatile emerging markets.
You can read the full announcement and details of the price they are paying (in shares) from this announcement on their website. While there is a useful sponsored note from Hardman & Co. here - which give more details on the Company Karpus that they are buying and also includes some upwardly revised forecasts reflecting the potential from this acquisition and the recent market recovery.
This seems to suggest that it could be on a prospective 6 to 7x earnings with a 9 to 10% yield assuming the deal is consummated in the third quarter of this year, that markets remain OK and that they do not see too much in the way of outflows from the target. They do apparently have some limited protection in the terms to allow for this though apparently. It won't help the liquidity much as they have now also acquired a (retiring) founder shareholder with a large stake in the business having just seen their own founder sell out in recent years.
Thus assuming that they haven't dealt at the top of the recovery and we are about to be hit with the rest of the bear market, then it doesn't look like a bad deal. Indeed if the market does remain benign going forward then it might be possible for the shares, over time to return towards their previous peak around 470p or so which would still only leave them on around 10x with a 6% yield which is levels they have attained in the past. As ever I guess time will tell on which way that pans out from here.
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!
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.