Bagging Brexit bargains

FIRE v London4 Comments

Even before the terrible news of Jo Cox MP’s murder, the Brexit referendum has become nail-biting stuff.  Polls are now suggesting a clear lead for Brexit (47:40), and while bookmakers continue to know something the polls don’t the bookies’ now give Remain only 65% chance of occuring, versus 80%+ only a couple of weeks ago.

This cliffhanger is showing up in the markets as a dip in FTSE, a drop in the pound, a drop in the Euro.  Bonds are remaining fairly stable.

With one week to go I believe we might see the market impact worsen/strengthen.  How best to profit from this turmoil?

My assumptions here include the following:

  • Markets overreact to bad news.  As Warren Buffett says, in the long run they are weighing machines, but in the short run they are voting machines. And voters are humans with humans’ cognitive biases – they overreact to bad news.
  • If anything drops, it’s the pound.  We already have a current account deficit of over 5% – which means money is flowing out of the country at a dramatic rate. The pound is nudging against $1.40:£1, a rate it hasn’t been at for 20 years.  I think a shock Brexit result could see it falling to close to parity to the US dollar – it hit $1.08:£1 in the early 1980s for instance.
  • Consumer sentiment will tumble after a Brexit vote.  Thus consumer spending will tumble.  This will in turn drive the usual cyclical recessionary cutbacks – companies will invoke hiring freezes, or worse cut jobs – new investments will be postponed, and so on.
  • Uncertainty continues.  At some level the result will  provide momentary clarity. But an Out vote will then launch 1001 ‘what now?’ questions which will take months and years to answer.

Which companies are badly affected here, in the short term at least?  The supposed list of victims here includes:

  • Property companies.  In the short term uncertainty will hit housebuilders like Taylor Wimpey and Persimmon.  In the longer term assuming the pound drops then foreign money will prop up demand. I suspect that the impact on the major landlords like Land Securities and British Land will be second order at best – their businesses are denominated in pounds and have pound-based clients on long contracts.
  • Retailers of foreign products.  Supermarkets, for instance, like Tesco, Sainsbury’s, Morrisons.  Clothing retailers like M&S, Next, Arcadia. Electronics retailers like Dixons Carphone. Household goods companies like AO.com. Department stores like House of Fraser, Debenhams.

Which companies are unaffected? Utilities companies, most obviously.  Doubtless Tobacco companies.

Which companies are positively affected?  Exporters (outside the EU, at least!) – which explains James Dyson’s support for Brexit.  And stress counsellors.

What am I doing about this?

Firstly I’m setting up some low Limit Orders to buy the following:

  • Tesco at £1.25/share.
  • Next at £45/share.
  • Persimmon at £16/share.

And secondly if Brexit happens and the pound falls below $1.30:£1, then I will be looking at our major exporters.  Specifically BAe, Rolls Royce, GlaxoSmithKline, maybe Diageo.

 

London’s squeezed middle

FIRE v London14 Comments

I really enjoyed two recent FT articles about the squeezed “middle” struggling on £200k household incomes.

The first FT article profiled a 45 year old married lady living south of the river with her husband and kids.  Their earnings “nudge £200,000 a year”.  The lady says:

“In theory, with our household income, we are in the top 5 per cent of the UK population and yet it does not feel that way,” she says. “If you’re earning millions of pounds, then you’re OK — and at the other end of the spectrum you get everything paid for. We are caught in the middle where we are paying for everything.”

The article lists various things squeezing couples like this:

  • School fees.  Killik & Co reckon there has been a 342% increase since 1990 in average private school day fees.
  • Childcare.  Nursery costs have risen by 69% in 10 years.
  • Loss of child benefit. This benefit, worth a maximum of £1k per child, feels more symbolic than real to me for £200k households, but the symbolism is powerful.
  • House prices.  Up 475% in 30 years.  And transaction costs have risen from less than 4% to potentially 15%. This means the old ‘upgrade every 7 years’ no longer works.

The article also cites a real issue of pension provision, as the funds required to maintain incomes of anywhere approaching £200k per year are far beyond what most ‘squeezed’ couples can dream of amassing. And more to the point the maximum tax-free pension pot of £2m per couple would not generate anything like their pre-retirement income.

In his article the following week, Janan Ganesh brings wonderful scorn and observation to the uproar that the first FT article caused.  Without even mentioning the article’s obvious omissions about lower mortgage costs and lower inflation, and with a down-to-earth groundedness that many of the FIRE community would appreciate, Ganesh reminds us of the average incomes in this country: Continue reading “London’s squeezed middle” →

My May 2016 portfolio returns

FIRE v London4 Comments

I’m cheating slightly, and capturing my May returns on the 29 May, during the UK’s holiday weekend.  This leaves out the last trading day of May, Tuesday 31/5.  In effect this means that 31/5 will become part of my June 16 returns, so it will catch up with me.

May has been pretty uneventful from an investment perspective.  The FTSE-100 index stayed at around 6300, and S&P remained close to 2100.

What else happened in May?

  • The Brexit referendum campaign started to feel like it is the Remainers’ to lose.  Certainly the economic argument feels settled. This leaves the sovereignty and immigration arguments still to play for, along with the foibles of random news events and turnout on the day.
  • At the time of writing nothing else of note appears to have happened in May, whatsoever.

Continue reading “My May 2016 portfolio returns” →