Duncan Smart's View

3 April 2017

Walker Crips Investment Manager Duncan Smart's view for April 2017

The American economist Paul Samuelson said 50 years ago that stock markets had predicted nine out of the past five recessions!! He was right then and he is still right today. Boom or bust, Stockmarkets are poor at predicting what will happen to our economy. The legendary investor, Benjamin Graham said back in the 1930’s, that markets were like a voting machine in the short term and a weighing machine in the long term. In other words, day to day markets are driven by noise, emotion and opportunism, but in the long run reality always kicks in. It is worth remembering these wise words as markets here and in the US hit all time highs, having risen in virtually a straight line since Trump’s victory in November. Supporters of Trump and Brexit use this as proof that the golden days of prosperity are just around the corner. Meanwhile the overzealous critics, Clinton, Blair, Osborne, Clegg etc. are wailing in despair as their predictions that the world would go to hell in a handcart have not happened. However, and there is always a however. When looking at stock markets, you realise very quickly that most, if not all the stock market exuberance is concentrated in the FTSE 100 thanks to the fall in sterling. Meanwhile, the FTSE 250 and the FTSE All Share Indexes have made very little headway in the past 12 months. In these sectors of the market, where companies import a lot more than they sell in the UK, margins are being squeezed and they are a lot less optimistic than their bigger counterparts. In the US, it is not a given that Congress will roll over and allow Trump to spend the amounts he wants to. They are already hitting their debt ceiling – a staggering $20 trillion! The harsh reality is, since the second world war, the US economy has performed worse under every Republican administration than it has under the Democrats, but for now that has been forgotten as hope triumphs over reality.

Have you heard about the strange case of the Swedish taxpayer? In general, taxpayers will pay as little tax as they can and pay it as late as they can, but not in Sweden. Indeed the opposite has happened. In 2016 instead of generating a budget surplus of £4bn, the Swedish Government generated a surplus of £7.5bn as businesses and individuals paid £3.5bn in excess taxes. How generous and what a country of philanthropists those Swedes are? OK, so maybe not. Thanks to negative interest rates, taxpayers have been very clever. Interest rates are -0.5% in Sweden and yields on Swedish bonds are negative – this despite inflation running at 2%. At your local Swedish bank, deposit rates are zero for small balances and negative for larger balances – so yes, you are paying someone to look after your money! However to encourage people to pay their taxes on time they offer an interest rate of 0.56% on balances held by the Swedish Revenue – and that is why they are awash with money – maybe HMRC should implement such a scheme here?

What do Heathrow, Thames Water, Harvey Nichols, Pizza Express and Hamleys all have in common? They are either fully owned or part owned by Chinese companies. The Chinese are indeed coming! Last year they bought UK assets worth £9 billion and there will be no doubt more this year as the country looks to diversify away from its local economy. Indeed the wheels are in motion for more trade with China, now that the railway linking our 2 countries is complete. The first freight train from China recently arrived in the UK having travelled 7,500 miles in 18 days to get here. Record numbers of Chinese tourists are also flocking to the UK, thanks to the fall in the pound and a simplified visa system. With the Chinese spending per head far higher than from any other country, this can only be good for our tourist industry.

With stockmarkets wobbling near all-time highs, this is not the time for going gung-ho and throwing everything but the kitchen sink at the stock market. With the FTSE 100 at 7200 it is important to look critically at those shares that have underperformed the market such as Dixons Carphone. If you have funds or shares that have not performed in the bull market, there is little or no chance they will perform any better in the next bear market. Reckitt Benckiser shares have performed fantastically well in recent years thanks to growth in emerging markets, but all this good news is built into the share price. They are also bidding for baby milk giant Mead Johnson and have offered a crazy price for this business.

Aviva have produced excellent figures with profits up 12%; The dividend was also increased by 12% as the company built up a hefty cash pile. Profits at Hastings have risen sharply to £78m allowing the company to pay a healthy dividend of 9.9p per share; The insurer now aims to have 3 million insurance policies in place by 2019. Sticking with the insurance sector, Legal & General announced profits up 17% to £1.6bn and upped the dividend by 7%. Manx Telecom, our AIM stock from the Isle of Man has announced good results with revenue up to £81m. Recent figures were good from Tritax Big Box, but the shares were trading on a hefty premium to their net asset value.

‘I never hated a man enough to give him his diamonds back!’ Zsa Zsa Gabor