Irregular Roundup, 29th August 2023

We begin today’s Weekly Roundup with the work of Hendrik Bessimbinder.

Bessimbinder

In the FT, Toby Nangle reminded us that most stocks are bad for your wealth.

• He was revisiting the work of Hendrik Bessembinder, who in 2017 reported that only 43% of US stocks outperformed one-month T-bills over the course of their corporate lives.

Stocks as a class still outperform cash, of course.

But [this] relies on the spectacular fortunes of a few stocks. Back in 2017 he found that 4 per cent of stocks accounted for the entire net shareholder wealth created between 1926 and 2016. Run the clock forward to December 2022 and this shrinks to 3.4 per cent of stocks.

Bessembinder has a new paper out (which we will review in detail in a later post) and he updated his global data in March.

58.6 per cent of US stocks since 1926 reduced rather than increased shareholder wealth. In around half of [global] markets more than half of stocks lost their owners money on a buy-and-hold-with-dividends-reinvested basis.

The second point uses US dollars as the measuring stick, rather than global currency.

• Work by another set of researchers found that in 80% of markets, more than half of stocks underperformed the local currency.

A staggering 74 per cent of UK-listed stocks underperformed one-month UK T-bills.

Bessembinder’s work is interesting, but its interpretation is more complicated than it might seem at first sight.

• You can read our eight articles on the topic here.

Premium bonds

The interest rate on Premium Bonds has been hiked once again, from 4% now to 4.65% in September’s draw.

• This is the eighth hike in 16 months – back in May 2022 the prize pot was just 1% – and the highest rate since March 1999.

There will be more prizes between £50 and £100K, whilst the number of £25 prizes will go down – but there will still be only two £1M prizes.

• There will be an extra 269K prizes, bringing us to a total of 5.79M and the new monthly prize pot will be £470M, up £66M.

The odds of a single bond winning a prize will improve from 1 in 22K to 1 in 21K, which are the best odds since April 2008.

• In May 2022 the odds were 1 in 34.5K.

NS&I CEO Dax Harkins said:

These upcoming increases show that we’re supporting savers up and down the country. Premium Bonds are one of the nation’s favourite savings products, so increasing the prize fund rate to its best level since 1999 and improving the odds means that more people will have the chance to win prizes each month.

Falling inflows to NS&I over the last few months meant that many observers were expecting another increase, but we are now at a decent (average) rate.

• Premium Bonds wins are also tax-free, whereas savings interest above £500 is taxable (for higher-rate payers).

And Premium Bonds are fully backed by the state, so the £85K limit from the Financial Services Compensation Scheme doesn’t apply.

• Unfortunately, the Government will only allow you to put £50K into PBs.

PayPal stablecoin

PayPal has launched a dollar-denominated stablecoin fully backed by dollar deposits, short-term Treasuries and similar cash equivalents.

• PayPal USD (PYUSD) It can be redeemed 1:1 for dollars.

PYUSD is an ERC-20 token on the Ethereum blockchain and is managed by Paxos Trust Company.

• Paxos will publish a public monthly Reserve Report for PayPal USD, with a third-party attestation of the USD reserve assets.

PayPal has 350M active users and already lets those in the US and the UK buy, sell and hold Bitcoin

• The new coin is, of course, US-only at this stage.

PayPal CEO Dan Schulman said:

The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the US dollar. Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.

A company statement added:

PayPal USD is designed to reduce friction for in-experience payments in virtual environments, facilitate fast transfers of value to support friends and family,  send remittances or conduct international payments, enable direct flows to developers and creators, and foster the continued expansion into digital assets by the largest brands in the world.

Paxos CEO Charles Cascarilla said:

With the launch of the first stablecoin by a leading financial institution, PayPal and Paxos are proving the real-world value of blockchain technology. PayPal USD is the most significant leap forward for digital assets and the financial industry, and Paxos is proud to enable this transformative product.

I have to say that the point of stablecoins completely escapes me.

• What’s the advantage of this over a dollar balance in your PayPal account?

No doubt in the future, some “killer app” on the blockchain will persuade me otherwise.

• I had no need for a gaming GPU until Stable Diffusion came along.

Hardcore crypto types pointed out that the new stablecoin’s smart contract code includes a “centralisation attack vector”.

• This means that PayPal can freeze or wipe out funds, in the same way that a central bank digital currency (CBDC) might work.

Revolut

Sticking with crypto, Revolut has closed its US crypto platform because of regulatory concerns.

• Buying stops from 2nd Sept, and customers have another 30 days to close their positions before access is removed entirely.

The SEC has been clamping down on crypto operations in recent months, and both Coinbase and Ripple have hinted at moving to either the UK or the UAE as more friendly environments.

Revolut said:

This decision has not been taken lightly, and we understand the disappointment this may cause. This suspension does not affect Revolut users outside of the US in any way, and impacts less than 1 per cent of Revolut’s crypto customers globally. Revolut customers in all other markets can continue to sign up and enjoy using our crypto services.

LTA

In FT Adviser, Sonia Rach reported that two-thirds of high net-worth individuals are considering working for longer, following the removal of the pensions lifetime allowance.

• The Saltus Wealth Index Report surveyed more than 2,000 people in the UK with investable assets of more than £250K and found that 72% planned to make use of the new rules in some way.

The average net worth of those surveyed was £1.6M.

• 19% were planning to work again, and another 35% were thinking about it.
• 45% had been using all of the old £40K pa allowance and 42% now planned to use the new £60K allowance.

Saltus partner Michael Stimpson said:

The latest Saltus Wealth Index Report reveals a significant and positive response from HNWIs to the government’s removal of the LTA cap on pension contributions.

We have seen a considerable number of clients wishing to discuss the reforms, eager to ensure they have the right plans in place that will enable them to realise their long-term retirement ambitions.

There are some complexities relating to the practical legislative changes that need to be considered though so it’s important you weigh up your options carefully.

Pension pots

Sonia’s second article this week looked at data on UK pension pots, obtained from the ONS under a Freedom of Information request by RBC Brewin Dolphin.

• The headline was that the largest UK pension is £11M.

There are 45K people with more than £3M, 128K with more than £2M and 929K with more than £1M  – a total of more than 1M pension millionaires.

• Despite this, the top decile for all pensions begins at £374K, and the top 5% have £638K or more.

Brewin Dolphin calculated that someone looking for a comfortable retirement requires at least £37,300 per annum to live on. To hit that target, the retiree would need a pension wealth of £630,000 in today’s money.

That sounds ambitious to me – with a 3% failsafe withdrawal rate, you would need more like £1.1M to draw down £37K pa.

Italian bank tax

The Italian government has revealed plans for a complicated 40% windfall tax on the extra profits that banks are making from higher interest rates.

• The finance minister had previously ruled out such a tax.

Italy follows Hungary and Spain in applying a windfall tax to banks., and Lithuania and Estonia also have plans. According to the FT:

The starting point [in Italy] is the net interest income (NII) each bank earned in 2021,before policy rates jumped. Each bank is liable to pay 40 per cent of what remains after deducting 110 per cent of2021 NII from 2023 NII.

The exception is if the government would net more by charging40 per cent on the remainder of a second sum: 2022 NII minus 105 per cent of 2021 NII.

The tax might raise €4.5 bn, which was around 3% of the value of the Italian bank sector before the announcement (which sent the shares down by 8%).

But the money raised comes at a cost:

Governments that mount tax raids on a whim can expect to forfeit receipts via higher risk premia on their financings.

The shareholders who finance the quasi-public utility of commercial banking will wonder whether their pockets will be picked just once, or repeatedly. European bank stocks are cheap for the reason that these institutions are the playthingsof politicians.

Quick Links

I have seven for you this week, the first five from The Economist:

1. The Economist said that China’s economy is in desperate need of rescue
2. And explained What China’s economic troubles mean for the world
3. And said that Arm’s public listing is set to break records
4. And that Arm’s flotation could revive the market for IPOs
5. And that America’s corporate giants are getting harder to topple
6. UK Dividend Stocks provided their Portfolio Review: Summer 2023
7. And Alpha Architect said that Structured Notes Are Financial Fairy Tales.

Until next time.