Weekly Roundup, 1st January 2020

We begin today’s Weekly Roundup in the FT, with Merryn Somerset Webb, who was advising us to buy British.

Buy British

Merryn Somerset Webb thinks that the general election result was pro-democracy and pro-capitalism:

No to uncontrolled money printing, asset expropriation, nationalisation and super taxation. This is good news all round given that history shows us that this is the best route to prosperity.

Her advice was to buy UK stocks:

[The UK is] on an average p/e ratio of 12.8 times and a price to book ratio of 1.4 times. Combine these numbers with a FTSE 100 dividend yield of 4.1 per cent against a long-term average of 3.6 and that puts the UK market at a 16% discount to its 30-year average.

The rest of the world is trading at a 5% premium to its 30-year average, and on an average p/e ratio of 15.6 times.

Even after correcting for the UK’s lack of tech firms, we’re on a 20% discount to everyone else.

• Domestically-focused UK firms have returned 40% less than internationally-focused firms over the past three years, and small forms have done worse than big ones, both largely due to Brexit.

She listed a few investment trusts to think about:

• Law Debenture
• Henderson Smaller Companies
• Temple Bar
• Diverse Income
• Mercantile
• Miton UK Microcap Trust

P2P

There was more bad news from the world of P2P, as ThinCats announced that it had scrapped its secondary market which allowed investors to raise cash by selling loans to other customers.

• ThinCat closed its doors to retail investors earlier this month, but now those investors will have to wait for their loans to be repaid, which could take years.

Landbay, the other platform which closed to retail investors recently, will be returning investors’ cash.

• But five other firms – ArchOver, CrowdProperty, Downing, Flender and Kuflink – also don’t
  allow investors to sell on their loans.

Others who do allow resales – including CapitalRise, Madiston LendLoanInvest, HNW Lending, Zopa and Funding Circle – charge between 1% and 1.5% for the privilege.

Despite this, David Stevenson in MoneyWeek was urging us not to give up on P2P.

Yields of between 3% and 7% per annum should be very attractive for those willing to take on some extra risk.

It’s not often I disagree with David.

• Not only do I find the headline interest rates too low, but the illiquidity, inflexibility, lumpiness, tax in-efficiency and difficulty of diversification are also all off-putting.

David notes that the new FCA rules are impacting the market.

On paper these regulations sound sensible and cautious, but the practical effect is that all the effort required to get private investors’ attention is proving costly and time-consuming.  

As previously noted, some platforms are dumping private investors altogether.

• I don’t think you should lose too much sleep over this.

Statistics

In the Times, Paul Johnson was writing about statistics.

• The mob he works for – the Institute for Fiscal Studies – has won the statistic of the year prize from the Royal Statistical Society (no, I wasn’t aware there was such a thing, either).

Unfortunately, it was to do with poverty, and I don’t agree with the current definition of poverty in the UK (relative rather than absolute poverty).

Luckily he had a few more for us:

• One-third of people of working age live in households that will qualify for Universal Credit (if/when it is fully rolled out).
  • Given the low level of unemployment in the UK, that is a testament either to the generosity of the welfare system or to a large number of (single?) parents combining part-time work with child care.
• 43% of people now don’t pay any income tax, because their taxable income is less than £12,500
  • This will include students, pensioners, part-time workers and spouses of people who are better paid.
• 50% of income tax is paid by the 3% of adults on more than £80K pa (Labour’s definition of rich).
  • The top 1% now pay 30% of income tax.
• The top 1% now receive 8% of the total after-tax (and welfare) income.
  • This is flat over 20 years but the number was only 3% in the 1970s.
• 42% of day-to-day public spending is by the DHS (NHS and welfare)
  • This is up from 26% in 2000 and 33% in 2010.
• As a result, all other public spending per-head is down by 21% since 2010.
  • Some call this austerity, but since we are still running a budget deficit I call it cuts.
• Public spending is still this same proportion of national income as it was in 2007 – it’s just spent differently.

Paul promises some more numbers in the new year.

• I look forward to them.

Bailey

Andrew Bailey has been announced at the successor to Mark Carney as governor of the Bank of England.

• His eight-year term will start on 16th March 2020, and he will be paid £495K pa.

Chancellor Sajid Javid said:

Andrew was the stand-out candidate in a competitive field. He is the right person to lead the Bank as we forge a new future outside the EU and level-up opportunity across the country.

When we launched this process, we said we were looking for a leader of international standing with expertise across monetary, economic and regulatory matters. In Andrew Bailey, that is who we have appointed.

Carney said:

Andrew is widely and deeply respected for his leadership managing the financial crisis, developing the new regulatory frameworks, and supporting financial innovation to better serve UK households and businesses. Over the years, I benefited greatly from his support and wise counsel.

So he is being spun as a continuity candidate – a “safe pair of hands”.

• Though Bailey is a former deputy governor of the Bank, he’s never served on the interest rate-setting MPC, which means that we can’t be sure whether he’s a dove or a hawk.

Amongst the challenges that Bailey can expect to face are:

1. Navigating Brexit
2. Dealing with the next downturn with a starting position of low-interest rates
3. Climate-change lobbying
4. The potential run-down of the BoE’s balance sheet at some point

I’m glad that the new government has taken decisive action to get rid of the undermining Carney, but Bailey is far from an inspiring choice.

• He’s a BoE lifer (since 1985) who hasn’t exactly covered himself in glory during his brief outing as the head of the FCA.

I suppose we should be thankful that we avoided a tokenistic appointment based on identity politics.

Quick links

I have ten for you this time:

1. Flirting with Models looked at Timing Trend Model Specification with Momentum
2. Ans at re-specifying the Fama French 3-factor model
3. Alpha Architect wrote about protecting the downside of trend
4. Not once, but twice
5. And about a test of Ben Graham’s Net Current Asset Value Strategy in London
6. And about improving the performance of deep value strategies
7. UK Value Investor asked whether it was too late to invest in UK housebuilders
8. ETF.com told the sad tale of the non-reset leveraged ETN
9. Maynard Paton looked at Bioventix’s “satisfactory” 2019 results
10. And the FT wrote about the big-name US investors putting money into the energy sector

Until next time.