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.
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!
A quick note for subscribers in these difficult times. On the Scores sheet in addition to the usual Scores measuring financial security, operational quality, dividend cover, & estimate revisions amongst other things. I am planning from today's update to add the underlying data points for these to the sheet to help you with monitoring and filtering stocks financial health, earnings changes and resultant dividend cover etc. more directly as the crisis evolves and we start getting more financial updates and guidance from Companies. I would recommend looking in particular at the interest cover column at the moment as anything less than 3x here could well indicate a company that may get into financial trouble from this or be in need of extra funds depending on how badly their business is impacted.
Secondly just to note that one of the stocks that was added to the Compound Income Portfolio this month, Jarvis Securities (JIM) when I said "Bought on Score as still operating & probably benefiting from more client trading, looks very cheap compared to HL. & AJ Bell & has cash rich balance sheet.
The CEO has put out a reassuring letter to shareholders. In this they suggest that they will still pay an interim dividend on or around 11 June 2020, to shareholders on the register at 22 May 2020, in line with the Company's dividend policy and a further announcement will be made when this dividend is declared. He also added that, as I suspected would be the case, that they had seen a pick up in trading activity post the election and since the virus outbreak, in common with other financial platforms. More encouragingly and something I was concerned might hit them he also claimed that he believed the reduction in the Bank of England base rate should have a negligible effect on interest income.
So all in all good news and it has cash on the balance sheet and the CEO finished his letter by saying; "Finally, I would like to reassure Jarvis' shareholders and wider stakeholders that despite the seriousness of the current situation globally and the effect this will have for the economy we are not seeing a detrimental impact on the Jarvis business model at this time."
Just be aware though that it is right at the bottom end of the market cap. size that I normally invest in and has a small free float so as such it is not terribly liquid and therefore the spread can be quite wide too. See the graphic below for a comparison on Jarvis with Hargreaves Lansdown & A.J.Bell. Take care, stay safe and enjoy the rally in the market while it lasts.
Further to my last post I thought I would do another quick update as the mayhem / madness in markets has continued and got much worse as the Corona Virus pandemic panic has spread around the World. After the lock down in Italy which has now just been extended beyond two weeks as I write, we are seeing similar things in Spain & France with likely the UK and maybe the US to follow.
Scary times indeed and it certainly seems to be trashing all economic forecasts and expectations in the short term & worse we don't know how long this may go on although China does provide an encouraging precedent that it may not be too long lasting if Western Countries can get it under control soon. Indeed it looks like after about 5 or 6 weeks Beijing is starting to slowly return to normal thus far, although Boris with his herd immunity strategy seemed to be talking about 12 weeks last night.
So maybe we might write off about 1.5 to 3 months of economic activity or 1/6 to 1/4 say. Which in itself might well be worse than the 2008/9 recession let alone any knock on effects that linger thereafter. So no wonder that the market has crashed I guess. Just wish I hadn't been so complacent about the effects of this virus, but I don't feel so bad about that as even Ray Dalio and Bridgewater Associates along with some other Hedge Funds go caught out by this too. Not sure why they didn't quarantine all the sick and elderly in empty hotels while letting the rest who are likely more mildly effected get on with and self quarantine as required without shutting whole economies down? But hey I'm not a virologist and any death is terrible so presumably they know what they are doing - hopefully.
it is probably too late to be panicking (in the stock market if not the Supermarket seemingly) although personally I did do some selling as things started to cut up rough but now wish I had done more given how far some of the stock I sold have fallen. But hey ho you have to take the rough with the smooth in this game and I have certainly enjoyed the ride up in the last eleven years. I did move more defensive and in addition to normal rainy day cash reserves I raised a fair bit of cash last year as we were moving home and needed some extra cash for that. Plus with the yield curve inversion I was worried about a recession ahead at some point. As we came into the year the market seemed to have forgotten these worries only for the Virus to finally cause the crash and bring on a recession.
Going forward it remains to be seen how this all works out with interest rates being slashed to record lows and central banks and governments flooding the markets with unfunded cash left right and centre. Its not clear how any of this get paid back, but I saw John Stepek of Money Week talking about this being the start of some kind of debt Jubilee with some or all of it maybe getting written off - e.g. Central banks just cancel the bonds they have been buying maybe? Guess it could all be deflationary in the short term followed by inflation thereafter due to all the money printing - quite frankly who know, your guess is as good as mine. As I said last time we are sailing or hunkering down as it were in uncharted waters.
As for the Compound income Portfolio, this normally does monthly screening. However it got its allocation of Ninety One Plc (N91) via the de-merger from Investec with great timing on the 16th March. This fell about 25p below the bottom of the price range 175p to 225p that was quoted, which didn't seem much versus the falls in the market & the hit taken by other asset managers. I noticed that the Employee Benefit Trust has been buying so I took the opportunity to slot my stock and that for the Compound Income Portfolio into this given it was a small holding and their profits and dividends may be pressured by all this. Plus the fact that other asset mangers have nearer halved during this period I think there could be more downside here in the short term. As for the balance of Investec that seems to have cratered like everything else & looks incredibly cheap, but again who knows how banks pan out from here. Their year end update today seemed OK but like everyone else they can't really say what the future holds.
With that in mind I would just caution subscribers to be careful with the Scores at the moment as they will reflect historic forecasts, which in the main do no reflect much if any of the likely hit to earnings other than for those who have already initially warned about the effects. In addition we are seeing lots of corporates suspending and even scrapping originally declared but not yet approved dividends so you probably can't rely on all the forecast yields being accurate, but again that comes with the equity territory. Having said that these are quite extreme circumstances which could mean that the dividend cuts this time around could be even worse than normal and those seen in the 2008/9 so watch out and be careful out there but don't you know....
March turned out to be another positive month for UK equities with a total return of just under 2% from the All Share Index. This rounded off a positive quarter as global equity markets recovered in a v shaped fashion from the big sell off at the end of last year as the US Federal reserve blinked and stopped raising interest rates. Thus for the quarter the All Share returned 8.67% and this has helped to turn the monthly timing indicators that I produce for the UK market positive again for the main indices such as FTSE 100 & the FTSE All Share. The Mid & Small Cap indices remain below their averages, probably reflecting their greater exposure to the domestic economy and the fears about the effects of BREXIT on the UK economy, but more on that later.
Meanwhile the Compound Income Scores (CIS) Portfolio had a stronger month in March with a total return of 4.4%, thereby recouping most of the under-performance seen in February. This leaves it up by 13% in the quarter & year to date some 4.34% ahead of the All Share. Since inception it is now up by 74.43% or 14.95% per annum over the four years it has been running. This compares to 24.16% & 5.57% over the same time frame and annualised for the All Share index which I use as a comparison. See the Portfolio link above or at the top of the site to see the full table of returns over that time frame and a graph of the performance against various UK indices. As it is an anniversary of sorts, I am hoping to do an update post on lessons from investing full time for a living over the last 10 years for me personally and for the CIS over the last four years. So do check back for that later in the month.
In light of the return to a positive reading from the timing indicators I have reinvested the cash that was retained last month and added two new positions funded by this cash and the proceeds from one stock that flagged up as a sell due to the fall in its score. I was happy to see that one exit. There were two other stocks whose scores had fallen into the potential sell zone, but as they are both decent dividend growth stocks suitable for long term compounding given their long history of dividend increases I decided to give them the benefit of the doubt for now. Subscribers to the Scores will be able to work out which stocks I'm talking about from the Portfolio and they will see the stock sold and the two new positions in the transaction and reflected in the Portfolio when the Scores are updated today. If you'd like to learn more about the Scores and how you can access them, details of the portfolio and transactions then please click here or on the Scores navigation tab at the top of the site or in the three bars if you are on a mobile or tablet type device.
Despite my reservation about the outlook for global growth etc. and the potential for a recession at some point in the next year or two it does seem that all the BREXIT shenanigans have left the UK market looking pretty good value and this could protect it from some of the downside if the worst should happen on the economic front down the line. In this regard I would refer you to a recent interesting set of slides from Research Affiliates which showed that the average retiree in the UK should be OK going forward as a 60/40% portfolio in the UK is forecast to offer fairly attractive real returns if their projections turn out to be any where near right. They also suggest UK equities are priced to provide very decent future returns, albeit with potentially high / normal volatility of close to 20%. You should note that these are unhedged US$ returns, so I guess they could also be factoring some recovery in Sterling into that too perhaps?
So despite all the BREXIT concerns in the short term the above suggests that the outlook may not be as bad or as bleak as the main stream media make out or maybe it has created an opportunity? As you know I tend to agree with that view that it is time in the market that counts, but nevertheless I'm still keeping an eye out for trouble on the economic horizon, but in the short term that too seems to have cleared up a bit as Central Banks seek to keep the show on the road.
Meanwhile on BREXIT I suspect it will be resolved one way or another fairly soon. There is an outside chance that we could crash out without a deal on 12th April. I would however attach a small probability to that as the majority of MP's don't want no deal and they have stupidly ruled it out any way. In addition the EU don't want us to leave either and since a no deal would be worse for them then they are almost certain to grant another more lengthy extension I would have thought. I then believe this will lead to a much softer or BREXIT in name only, if at all. Alternatively as I have suspected from day one we may be forced to vote again and get the "right" answer as far as the political elite / EU are concerned. Indeed they have already suggested that the second referendum should be a choice between whatever "deal" on a soft BREXIT in name only they eventually come up with or on remaining, with leave not even being on offer on the ballot paper, which I guess would ensure the result they want! See this interesting piece on the likely way forward called UK Independence Day Cancelled which appeared recently on the Market Oracle web site & included a link to his very prescient piece from about two years ago about the Game Theory Strategy the UK should have followed to win, which then predicted the shambles we find ourselves in now.
Thus given the UK market looks cheap, the pound is probably undervalued, institutional investors are largely underweight and BREXIT ain't happening I think the UK could actually do relatively well. So you probably should keep calm and carry on compounding for now, although as I said earlier I remain on alert for signs of deterioration in the economic outlook which might signal more difficult times ahead. I think this is especially important given how mature the current economic and stock market cycles are at this point and the levels of debt in the world which have been encouraged by Central Banks super easy monetary policies over the last decade. Plus the fact that it is not clear if we are out of the woods yet as markets remain below their recent highs, so this could still be a bear market rally for all we know.
With that in mind if you have read this far, as a reward I'll leave you with this link to the Q4 letter from one of the Top Performing Macro Hedge Funds last year, who benefited from their bearish stance and who still see us as being in a market which is vulnerable given their Macro Model has topped out, valuations, debt levels etc. Enjoy and don't get carried away out there with this Q1 rally, as if we end up with a Corbyn led government then heaven help us and all bets are off!