I suspect I am not alone in having liquidated most of my holdings. I am looking at all the cash sat earning no interest in my dealing accounts.
I just can't bring myself to buy bonds. With current yields they feel like all downside?
Any different opinions?
Other than that there's the odd special situation - Balfour Beatty (LON:BBYB) for instance is due to wind up in just over a year with a yield to redemption of around 5.5%.
Talking of special situations, there are some Provident Financial bonds worth looking at which are trading below par. I have a slug of the 5.125% notes (66WS) with a GRY of 5.8% maturing in October 2023.
All the best, Si
I've screened the gold miners and then looked at the QV scatter diagram.( An outright crash should provide the momentum!). After screening for political uncertainty etc. and reading the recent RNS's I've bought a few Centamin (CEY).
If there's a rise in the gold price, most of it should go to the bottom line. Here's hoping!
Hi sharmvr
If you want a blog then www.psyfitec.com is the place. Not that I spend much time there these days. Plenty there to consider about bear markets, though.
I agree that there's some anchoring on the last crisis - and that wasn't your normal bear market. The bargains were utterly astonishing. Quality stocks on 5%+ yields and single digit P/E ratios are not normal. Of course, I'd anchored on more normal declines and started buying well above that. So what do I know?
However, the decade or so since isn't that normal either - QE has made debt easy to service and many companies have got lax about managing that kind of risk. Typically as conditions start to tighten then it's the cashflow that takes the strain and all sorts of dubious accounting starts to come to light. We now appear to be seeing a succession of such issues, which is usually an indication of choppy economic times ahead.
For investors recently the easy money has been made following momentum. Now I don’t dispute that momentum investing works, but markets are roughly efficient so there are only two ways of actually making money – either by exploiting asymmetry of information or exploiting the behavioural biases of other investors. That’s OK when there’s a rough balance between the two – momentum investors drive the market higher or lower and value investors exploit the lack of efficiency in that process to dig out bargains and return the market to a roughly efficient balance. But recently it’s been really really hard to find any value in the market, suggesting that even a lot of value investors have given up and started following the momentum trade. Hell, I did, so I’m not in a position to lecture anyone.
But that feels roughly reminiscent of the end of the dotcom boom – valuations didn’t matter, it was all about the momentum trade. And when that fell apart because there were no earnings to service the debt then the whole edifice came tumbling down. And when that happened there were plenty of old economy stocks earning real money that could be picked up cheaply ... if you had the cash to buy.
Now this isn’t a bear market yet, but it feels like one is just around the corner. That’s could be because I’m looking for one but there do appear to be a range of indicators lining up – interest rates being raised, trade wars going on, migration flows being halted, a plethora of earnings surprises to the downside, an increase in market volatility and accounting issues coming to light – that are suggestive of something that’s very like a bear market.
And, of course Brexit, which will not just affect the UK but will be at least a short-term drag on the global economy. That’s not a comment on whether Brexit is good or bad: it’s just inevitable that if you add friction to borders that didn’t previously exist without any compensation then it’ll have a negative economic impact and if that happens as we have a downturn anyway it could turn a dip into something worse.
Anyway, enough woolly prognostications. If a bear market (that's still an if, btw) is upon us we should expect to see a series of downward lurches with intermittent rises. Typically this would be predictive of an economic downturn, and we’ll see more earnings downgrades and the slowdown takes hold. Roughly there are two ways of playing this. Firstly, you can take a momentum approach and get out of the market (or short it, although I don’t short myself) and wait until it turns. You’ll miss the up-tick on the turn, but you’ll be protected.
Alternatively, you can take the value approach and invest into the downturn. That’s harder because even if you do find a bargain there’s no guarantee that it won’t get cheaper. But then it’s all about the numbers and not the name: we want shares with a margin of safety, low or no debt, preferably with good ROCE and Op Margins and definitely with good cashflow. For a long term value investor those are the good times, and the reward comes on the up-swing.
But it's easier to say what you shouldn’t do: (1) don’t go into a downturn geared, the gearing can kill you, (2) don’t think because a stock has fallen 50% that it’s a bargain, future earnings are a figment in a downturn and it still has another 100% it can fall, (3) do diversify, as accounting issues can appear from nowhere and send any individual stock to zero without warning, (4) make sure you have a cash buffer, you don’t want to be a forced seller while prices are depressed.
Oh, and (5) never stop listening, never stop learning. The worst behavioural bias of all is not taking into account alternative views: as Charlie Munger says, always look for the evidence that disconfirms your theory, any fool can find that which supports it.
And good luck!
timarr
Any thoughts on Lloyds Banking (LON:LLPD) ? I still hold a few of those.
Allegedly irredeemable, so essentially a very long dated fixed interest bond. As interest rates rise you'd expect these to fall in price to maintain the difference between the risk free asset that is a government bond.
Very different characteristics to Balfour Beatty (LON:BBYB) which is a place to park cash in the short term and get a decent yield at relatively low risk. And there's the ever present possibility that Lloyds may try to redeem these at par as Aviva tried to with theirs earlier this year. The outcry has probably scared managements off for the time being, but there's always a risk.
I have a few as well, bought back in 2009 in the depths of the crisis. The dividends since have covered my initial investment so being redeemed wouldn't be a killer. I can't see much reason for buying them now but at below 100p I'd be very interested.
timarr
Hi timarr,
My own fault for then double checking using your earlier 3 dividends scenario. The 4th dividend makes all the difference and in fact my IRR calcultor suggests that there is 6.20% to be earned here - so, maybe like a fool, I've bought a few more today.
Re LLPD (and LLPC) I do hold quite a few of both but I'm not sure the danger of a call at par should be underestimated. I think the FCA wrote to all the usual PREF/PIB suspects and, as far as I know, Lloyds haven't given any meaningful reassurance.
There are other issuers that, I feel, are less risky (Aviva, Ecclesiastical and others). Of course, if you really want to push the boat out and get silly returns then you could look at Raven Russia's prefs. After all, what could go wrong? Yes, I do have quite a few Raven Property (LON:RAVP) too, just to confirm your suspcicions.
Best,
Hi Timarr,
Thanks so much for the response and your very considered comments - will certainly take a look at the blog over the weekend.
I dare say your post would be worthy of an article in its own right and I am sure there are many of us who haven't dealt with much more than a short term correction.
Thanks again - much appreciated.
Good luck to you too.
V
You might consider buying some shares in Capital Gearing Investment Trust:
http://www.capitalgearingtrust.com/~/media/Files/C/CGT/investor-docs/results-and-presentations/Investor_Day_Combined.pdf
Hi Laughton
My own fault for then double checking using your earlier 3 dividends scenario.
Soz. My memory isn't whatever it used to be. Whatever that was.
On Raven Property (LON:RAVP) let's just say it proves that not all prefs are created equal. It's not something I'd personally touch with a Novichok tipped bargepole. But we all have different risk preferences, so each to their own.
All of the standard financial prefs I view as at risk from morally bankrupt managements trying to close them down and I wouldn't pay anything over par for them. Given that interest rates in the current cycle will probably peak around 4% that's unlikely unless we have another financial crisis. At which point we'll probably all be too scared to buy them again, for fear the whole system will go under.
Ecclesiastical Insurance Office (LON:ELLA) I regard as a different beast. It's a really interesting company: it's well worth reading their annual report and their unequivocal condemnation of Aviva's attempt to redeem their prefs through the backdoor. I'll be looking to add as interest rates peak.
timarr
The US Treasury ETF is IBTS. As stated, I only bought that because I couldn't find one in the 1 month treasuries. Currently it's a modest position. More analysis will be needed before adding to this. I also welcome suggestions from other readers with more experience of this field.
As for where to park investments, I've been operating on the following rules:
1 Anything subject to a 40% marginal tax rate is paid to the SIPP.
2 Use the annual ISA allowance in full.
3 Try to ensure companies paying good dividends are in tax sheltered accounts, so the taxable dividends do not exceed the £2k annual allowance.
4 Use the annual CGT allowance in full.
5 Finally, consider spreading some holdings around. For example, Paul's thesis on Bohoo looked pretty good when it was ~28p. After it 10 bagged in a taxable account, it somewhat smashed my annual CGT allowance.
If you have a lot of cash dont ignore NS&I 100% backed by the UK Government and easy access.
The rates don't look very attractive. Other accounts are also backed by UK Govt. up to £85,000 per financial institution.
Hi Herbie
In order to get a 100% safety up to £3 million you would expect a lower yield but in my book it is well worth losing 0.25% when I know that unless this country actually goes down the pan and all the banks with it my money is 100% safe. It is also worth remembering that the max you refer to is per group, so it is always worth checking which bank is in what group.
Hi Ken, I wish I had your problems, I don't have £3m in cash unfortunately. The NS&I rates I can see are 1% and 1.15%, you can get rates around 1.4%-1.55% quite easily, which is about 30% more. Yes for people with large amounts I can see they may appeal.
Herbie
There are many ways to make money but not losing it is the best way and that goes for money in banks. Hopefully we will never have to test the £85k safety net, but it could take months perhaps even years to get what is yours if it is ever triggered. Do you think any one believed me when I told them in the nineties that banks could go broke so spread the risk. Of course not and although I said it-- I didn't expect it to happen, but it did and it could have been very nasty. Spread the risk, even if you have less than £85k- How much would it cost you? 0.3% of £50k is how much!!!, you would pay more than that in a spread for a one off trade.
Regards
Ken
Yes fair points, it is spread around, most is in fixed rates so the rates are higher, over 2%, not much in instant access as not planning to invest it for a while and I also have plenty of cash in my ISA share account. Can't remember how long it took to get my Northern Rock or my Icelandic bank money, don't think it was that long. I've had problems with NS&I in the past with their inaccurate records.
Many thanks for the pointer.
I have made purchase of IBTS and IBTM recently to put cash to better work. Think this will become a currency trade as much as anything else!
Also, to add to the debate, a bond etf I have held a while in ISA (down 8%) is SEMB. Supranational and emerging market $ denominated govt bonds. Yield close to 5% which is comparable with US junk.
Personally I would expect long term yield to match developed markets, so I think it's attractive return given no short term need for cash and can bare currency risk.
Might be worth considering - dyor.
Hold ISHRS TREAS 7-10YR USD DIST ETF (LON:IBTM) IS TRES.BD1-3YR UCITS USD DIST ETF (LON:IBTS) £semb
Balfour Beatty (LON:BBYB) available at just under 110.25p this morning for what I calculate to be a IRR of 6.12% (please do your own calculations)
Just couldn't help myself - much better than money in the bank.
