Derek Arden chats with Justin Urquhart-Stewart – Market Forecasts
Market Forecasts – Media commentator Justin Urquhart-Stewart, the man with the red braces, the economy, the markets and the opportunities and threats in the next year.
[THIS IS A TRANSCRIPT OF THE INTERVIEW – JILL ENGLISH]
Derek – Hello everybody, welcome to Derek’s Five O’clock Chat Show. Yet again, I have the commentator and financial guru with us, Justin Urquhart Stuart, I’m absolutely delighted to invite Justin for the third time to appear on the show and I’m particularly interested, and I know the viewers are particularly interested, in what’s going on in the financial markets. It’s two months since we’ve seen you, Justin. Thanks again for joining us and we’ve got a number of questions that we’d like to ask you.
Personal investments – the basics
But first of all, we have some finance people on here, finance experts, but we also have some people who just want to leave their money in a safe place, and trust the system and have a pension at the end of it, and they’ve been reading about Neil Woodford and all sorts of strange things that have been going on. Would you just give us a run through on the basics, and why you know you can lose 25% in a secure fund, like that, that you would trust and Hargreaves Lansdown have been recommending it for years, and make an extra charge as well for doing so?
Investment, charges and cash
Justin – And the answer, it all comes down to the original problem is that no one has ever educated, any of us about finance; whether it’s in terms of personal finance, ‘How much money do we need to have in our family in order to retire?’ By the time we’ve actually worked it out, we’ve normally retired, which is a bit late. And it should be, not as part of the curriculum, it should actually be part of a standard structure whereby people should be leaving school with a much, much more practical, better understanding, of not only what they’ve got to try and save, how much, and the sort of returns.
Now, all of that can change and in the past year, we’ve seen a huge change, all the calculations you could have made say, five, six years ago is to what your sort of reasonable return would be, have now being halved, and halved again. And so, your returns are going to look pretty thin, the result of which, the charges – some overt, some not so – will seek to actually, not only just erode, but actually sometimes just destroy any returns you have been being getting. And also, actually then to understand, there is very little which is risk free. Cash isn’t risk free, as people will remember from the banking crisis, and how banks can go bust. Cash is also is not risk free because the rate of interest you’re getting on it is actually lower than the rate of inflation, so it’s devaluing. So, it’s a very difficult situation where you try and find something which is reliable, and there was always … my first pupil master actually so when I was at Bar School, but talking about finance, he always said, “Rule number one of investing is, don’t lose the sodding stuff. Rule two: refer to rule one.” And it may sound stupid, but you’d be amazed at the number of firms I come across and portfolios I come across, where they haven’t actually just made money for people in the longer term.
Neil Woodford – the ‘golden boy’?
And you don’t have to be a star, you don’t have to be … let’s assume Neil Woodford two or three years ago… Everyone loved him because he could do no wrong. The trouble is, if you looked inside, you’d have actually been much more concerned, but no one wanted to do that. No one wanted to actually sit down and say, “The Emperor appears to be somewhat sartorially challenged.” In that particular case I did actually challenge it and I found myself facing a rather stroppy legal letter, threatening all sorts of things, because fundamentally what he was doing wasn’t illegal, but it was misleading to anybody who really thought, compared to what people expected they were going to be getting out of this.
And he and his fellow colleague when they were at Invesco together, a chap called Barnett, and they ran their fund together. When he split away, they effectively ran two funds which were almost identical. And they were buying into medium sized stocks, which aren’t very liquid, not easily tradable, and as they were buying into them, of course, the price was going up, because they said they were buying them, and everyone’s, “Good to see that,” and they were effective pushing the price up, to the extent that they ended up controlling, in quite a few occasions, 40% of the entire stock, which meant, effectively, they were the company. It meant also that they couldn’t sell it, because if they started selling it, then they will automatically force the price down. So, it was a ludicrous situation to be in. And then they had also, it was supposed to be an equity income fund providing with income, so some of the companies weren’t even floated and weren’t providing an income. For those in the UK may know the name of Purple Bricks, as an online estate agent, whether they are any good or not remains to be seen, but hasn’t made any money yet, and certainly doesn’t actually have any publicly quoted shares [Otter heard puppies and crazy chairs], but those who had Woodford, and also Mr Barnett’s fund as well, would have found themselves with a happy little dose of that, achieving absolutely nothing for anyone. Okay what’s your question, Where do you go to?
Derek – yeah that’s the question.
Where do you go to? Gold? Government debt?
Justin – Well it’s reached the stage and I’ve always been incredibly cynical over gold on the basis that, gold you get … as soon as you mention gold, you get various people coming out of the woodwork, called gold bugs, who will tell you that actually gold has been a fantastic return ever since Queen Cleopatra had trouble with an asp. Well, I don’t know about you, but I wasn’t around then and the asp is still there. But the point is this, gold doesn’t give you any income. And you can sit it look at it, you could lick it if you like, that’s about it, but put it on the pillow next to you, stroke it. So, it’s really a matter of whether it goes up or down.
So, I have not been much of an advocate for it. However, we’re now in a situation where equities are so unreliable, to say the least and we all know what’s been happening with the economic reports and the corporate reports over the past few weeks, nothing particularly surprising there, no, it’s been bad news. And then also, the bond market where you’ve got then returns on the bond market looking very thin indeed, you’ve got some government debt, which is negative. And you’ve got some government debt, take for instance Portuguese government debt, which is effectively cheaper than US, are you really saying that Portuguese debt is better than the US? Well, of course we’re not. So, we find ourselves in a strange position, and that’s why people then start turning to gold or maybe silver. And whereas a few years ago that was actually quite difficult to do, unless you actually want to buy a lump of it, unless you happen to find an old Nazi train on the bottom of Swiss lake. But now you can actually do so by buying an exchange traded fund, very simply, and you can buy the value of gold or silver or various other alternatives like that, very easily indeed, so long as they are physically backed, actual so that what they’ll be saying is, “You bought your x ounces of gold and they actually exist in that little hole down the corner of that safe secure area,” because you’ll find other ones which are the equivalent of gold. and if that does go wrong, there’s not necessarily any gold at the end of that particular rainbow. Anyway, it’s a huge question, that’s barely a proper answer.
Property?
Derek – I’ve always liked property, Justin, because I can control it, there’s no intermediary, and I can go and touch it, touch the bricks. Now is that good or bad?
Home-owning
Justin – At the moment it’s gonna be actually quite dangerous. First of all, we have to have this fixation, certainly in Britain, there’s this lovely line that Britain has been a nation of house owners. Well, actually that’s not been true. Ever since Mrs Thatcher was selling off the council houses, we had that housing boom, then we have a lot more people owning houses. Prior to that, you had a lot of people actually doing long term rentals, I mean long term, talk about lifetime rentals. So, people didn’t actually have to fork out for the purchase of a property.
Of course, in Britain, particularly obviously in London southeast, that’s actually a huge amount. And over the years, you could become a millionaire in the southeast by doing absolutely nothing at all, having bought a property. But it’s gonna be very difficult for the next Generation. If we brought back longer-term leases, you’d still be paying for the lease, but you wouldn’t have to bear the mortgage of buying the property, and therefore you could actually use that money for other things to invest in, giving you possibly greater flexibility. But rule one of property, if it’s your home; it’s your home. You know it’s not something that you would be buying and selling the entire time, you should want to live there, probably for some time. I would obviously want it to make money in the longer term, but buying and selling property itself is a bit of a gamble.
Buy to let – the bubble has burst
We’ve had ‘buy to let’, was a fashion for several years in this country, hardly surprising because the tax breaks were stupendous. You could even offset the interest on it, it was brilliant. All that’s gone. There all sorts of now, extra taxes you pay for buy to let, and so therefore, that area has gone, plus the fact, when you are letting property, most people who’ve done it for any period of time will tell you, you make money out of the capital value, not necessarily out of the rent itself, you may make a bit, but by time you have dealt with some tiresome tenants, and I have to say, even when you think you’ve got a good tenant, they’re not you, they don’t love the house, they, as far as their concerned, they will not necessarily wreck it, but they won’t treat it like their own. So be wary of property.
Commercial property
Now the other issue, and I was doing something actually the day before yesterday for Chinese television, well a British outlet, about what’s happening to UK commercial property, and they were focussing on what’s actually happening in the City of London. And we all know, have seen pictures of the City of London, it looks like a ghost town at the moment. And because so many people are not being asked to go back to the office. Quite a lot of them I know for UPS, Seven, they’ve been told, “Don’t come back until after Christmas,” which is astonishing. And in fact, quite a few of them are saying, “Actually, don’t come back at all.” And what we’re going to be seeing is more of those, I think we’ve just mentioned before that rather rude acronym of people becoming ‘twats’, my apologies. The twat actually stands for Tuesdays, Wednesdays and Thursdays. So, people are actually spending a few days a week, attending the office. Why? Because then you can still actually be able to garner and develop the team attitude, which is so important with companies, I think it’s important, to management actually properly being seen to run their people, which is very difficult, just on Zoom, and also being able to have that mutter from the gutter that you need next to the water fountain and the canteen and things like that. So, what they’ll be doing is having groups coming into the office.
Now in the case of Seven, I know certainly a lot of the big investment institutions, they’re going to take the opportunity at the next rental break – normally on five or on a lease of 10 years with a five year break – actually to restructure, which is a euphemism for actually saying, cut back their property holdings, in my case that’s probably going to be about over 50%, and that’s a huge saving for them. Now you take 50% say 40, 30, it doesn’t really matter, of commercial property usage in the City of London, and then also Canary Wharf, that’s going to be a huge issue of open property, you’re going to see an awful lot of now apparently designer flats suddenly appearing in what used to be offices.
Retail
But look at the retail side, sorry, I’ll shut up in a second. Now the reason I was saying that, if you look at the shopping centre underneath Canary Wharf, that’s quite a high-end shopping centre, shopping mall. And as well in the city all the Pret a Mangers [Otter heard pressure mortgages] and things, they’re dead as a dodo [Otter heard that that is an odour], and they’re not coming back. So, in terms of commercial property, that’s very dangerous at the moment.
Restaurants
Derek – Okay, I mean that’s what I was going to ask you now, these property companies are highly geared, land securities people like this, the retailers are highly geared, we’ve seen all these restaurants going bust because they’re highly geared with private equity money, or even emergency money or whatever the word is, what’s going to happen, that worries me, what’s the outcome of that? They’re gonna go, and then restructure.
Justin – Well, remember, a lot of those you were talking about, some of those high street restaurants, a lot of those were gonna go bust anyway, because, remember we sort of slightly forgotten this now because of the virus, we were heading for a slowdown / recession, and a lot of those businesses, were gonna have difficulty.
Remember private equity, they don’t give you debt, they organise for you to have more debt. And it’s a three-year investment, they’ll say it’s five, that’s only if they cannot sell it in three. And so, you get pass the parcel, it will get sold to another private equity firm come along and say, “I’ve got this cracking good idea, if we get some more debt for you, we could actually grow it again.” And so that’s what you have, so you end up with. And Jamie Italia, or Carluccios, and the other ones, all of which were heading for the rocks anyway. Actually, they failed last year and you’ve seen more go this year.
Zombie companies
So, watch out for those, and I was writing today about ‘zombie companies’, we’ve got to be very careful, about overly dramatic titles, Zombies for me never got much beyond sort of Michael Jackson’s Thriller video, but companies which should have died, but can’t, because the banks, or whoever’s lending the money, don’t want to go through the final act of pulling the rug. As they normally like to pull the rug, not at the bottom of the market, when things are starting to recover. Well they aren’t starting to recover at the moment, and also a lot of the banks don’t want to actually pull the rug, because that means they’re going to have to put aside money to cover that and capital is at a premium so they don’t want to use it up. So these companies can’t grow, they can’t get more capital, at the same time they’re not dead. And these are the ‘zombie companies’, and we need to be very careful you don’t find yourself stuck in that particular position, and you’re going to see more of those coming through, as they run into financial problems.
Investment companies
Derek – How’s your investment and your legacy in Regionally going, I see Funding Circle share price dropped by about 80% and Amigo, I think that’s another… Are these all similar or don’t I quite understand what’s happening, can you….?
Justin – No, Funding Circle… no, Amigo, there’s nothing particularly original about that, that’s just getting someone else to actually guarantee your loan for you, that you would you do with a bank and you drag your father or uncle along with you to actually sign it off and act as your guarantor, so Amigo loans promo had a great advertising campaign, and the loans aren’t particularly cheap, and they were aimed a particular area of the market, made a lot of money and I think there’s an awful lot of bad news gonna come out of that of mis selling of such like.
Local investment
Things like crowdfunding, which is I’m afraid, some disasters are going to come out there because it hasn’t been properly regulated, it sounded good whilst the sun is shining, but when you start getting failures life gets a bit more painful.
What I’ve done with Regionally is not actually investing people’s money in this, what I’ve tried to do is put back some of the infrastructure’ so that regional companies can get more investment. At the moment, if you were, say, investing money with local authority pension fund, where does that money go now – the answer is it will probably go to a good firm, maybe Seven Investment Management or UBS or something like that – and they’ll give you a nice balanced portfolio spread over different asset classes all the way around the world, but not in your local town. So, if you’re in Newcastle, how that money is going to go to Newcastle? None. So actually, the system has been bent, so that this infrastructure will enable people to invest in regional businesses, has meant that those businesses don’t have access to capital.
If you put that piping back, that means those businesses can be matched up with investors, not just in the region but elsewhere as well. And they need proper corporate advice, and corporate advisors are quite often the regional accountants and those ones, to do the due diligence on it. And then you have a platform so these companies can be listed, it’s not a stock exchange, but it’s a means of being able to promote the awareness of these different regions, those companies there which people can invest in, getting companies to understand that they should design their shareholder base, who it really wants as shareholders.
Who are your shareholders?
An awful lot of companies end up with, “Well, give us the money, I don’t care the shareholders are.” Yes, you should. Is it for family, inheritance is it staff, is it your suppliers gonna to have some, your clients maybe, or is it just long-term investors? More to the point, you probably don’t want short-term investors. And so, actually getting companies to think about that, getting access to more capital into the regions, because who’s going to do it, it’s not the bank’s job they’re only there to provide debt, and normally relatively short-term debt.
And so there are regional investment funds, but they’re still relatively small and this is for growing businesses to half a million and 7 – 10 million, and then providing them on this platform, the ability to trade those shares, as a secondary issue, not as a primary issue, so that the company can then say, once every three years, five years or once every few months, enable people to actually buy or sell those shares, establish the price, and you do that simply with a matched order board, which is simply an order board, you put up the price at which you’re selling, and it matches with someone who actually wants to try and buy it. It’s very cheap, easy to regulate and provides low cost capital for British growing businesses, which have found it always very difficult to get more capital. If you are starting up, there’s lots of start-up schemes.
If you’re a larger company, then there’s lots of alternatives there but if you’re in that bit between half to 10 million, it’s really difficult to actually try and find that money and give you the opportunity then to actually get the right shareholders you want. This is going down extremely well, I’m pleased to say. So it’s not just a matter of giving people money, it’s making sure that infrastructure is in place, connecting the investors to those companies in a properly regulated, with structure with proper due diligence, so hopefully that’ll make it, I think, not huge difference, but a significant difference to quality British businesses and the regions.
Justin’s newsletter – making investing interesting
Derek – fantastic. That’s absolutely brilliant, congratulations from all of us, for what you’re doing there and we wish you absolutely well. We have got Tim from Texas on and you mentioned China, and you wrote about China in your newsletter, oh by the way, how do people get hold of your newsletter, if they email me, I’ll email you and you can add them,
Justin – by all means I could very happily put them on our circulation. Equally, I think it’s on your website. And equally Of course it can come to the Regionally website (www.regionallyuk.co.uk) as well but delighted send it directly to any of your clients [Otter heard fans], very happy to do so, just forward the email address on and I’ll be able to do that.
And the idea is not to try and sell Regionally, the idea is to try and provide something that was always important to me, to try and make investment information interesting. You can’t make it necessarily entertaining, that can be a bit flippant, but you could actually try and make it at least engaging for people and get away from some of the useless technical jargon, which are frankly just often just a spurious armour, that people put on because it makes them sound as though they know what they’re talking about. And I do find that quite funny because in the past I’ve actually made up certain apparent technical terms in the city, and found a few weeks later, people start using them. And it’s rubbish! I had one. I had one which was called an armadillo and one [???] guy said “This is an armadillo stock”. And by which I actually meant it was a heavily scaled-back new issue, and the share price was scaled back. And lo and behold, three weeks later, some other pompous git, probably like me, came on, said, “This is an armadillo.” You think, well, if you could make it up! It shows how shallow some of these things can be.
Currencies?
Derek – Perhaps we should make something up on here and then see if we can get it into circulation. The Financial Times had a big article about a greenback and the dollar on Saturday, the dollar’s trading at £1.30, I was thinking about buying some and seeing what happened with Mr. Trump, but what is happening with the dollar, it all looks a bit exciting …
Justin – it is, and the weakness of the dollar is, is quite a remarkable situation. Remember, we have reserve currencies in the world, what’s the reserve currency? Currency which central banks use to keep reserves in, very simply, the largest one is of course the dollar, the second largest one, which is about 60-65% of all government reserves around the world. The next one is the euro. After that you’ll have the yen. And then also a very small amount is actually still Sterling, which is still a reserve currency. The Chinese would say that yuan [?] or NIMBY [?] is reserve currency, no it’s not, would like to be, but it’s not properly tradable as yet, as quite rightly the Americans do highlight the fact of course.
The Chinese have a habit of manipulating their currency, which is partially true. I have to say, find any country which doesn’t actually try to influence the value of its currency, it will always have that in the back of his mind, but the Chinese can actually do that very directly by putting controls on it. So, what’s happened with the dollar at the moment, there’s been a lot of fear as to what’s happened to the American economy, so people actually pulling out of the dollar, but the question is, ‘where are they going to go. is Europe looking much better?’ Not really. And that’s why people have been therefore now looking at gold, and looking at gold, not because it’s actually gonna provide an income, because it doesn’t.
There’s not much you can do with gold you say, you can lick it, you can stroke it, put it on the pillow next to you, but you hope it’s actually gonna go up in value, but more to the point, hopefully, hold its value. And so for about, I think only of the second time my investment career, I like to say to people, “Actually buy some gold and have that there as that sort of level of security for the time being, until we can actually start seeing the other side of what’s happening with the virus and getting the recovery starting to come through.”
China
Derek – And you’re on Chinese television, you were quite brutal about the Chinese in your newsletter about two weeks ago, do they want to talk to you about it?
Justin – If you don’t see me in a few weeks’ time you know what’s happened just check the concrete in the garden and see if it’s been freshly laid. I was actually just going through; they would often tell you actually how wonderful everything is with China. Well actually, there are 17 active border disputes that the Chinese have with their neighbours, and it’s quite fun, if you just go round some of those actually see what’s going on, it’s not just old historical dispute staging back to the Chinese emperors. though there are some of those too.
But the East China Sea where they’re bickering with the Japanese, and that’s very dangerous, because that’s two large powers butting up against each other. And remember, the Chinese and the Japanese don’t get along terribly well, the Japanese seem to be short on one particular word which they like using which is sorry, and the Japanese Prime Minister has an unfortunate habit of turning up at the war shrine which happens to include some of the less than pleasant individuals who are convicted of war crimes, and he knows exactly what he’s doing by going to that war shrine, he’s tweaking the dragon’s tail. This has got nothing to do with oil and gas, it’s got something which is more important in the Far East, and certainly I know from my family – face, pride, who’s gonna back down, then you’ve got the issue of the South China Sea where the Chinese apparently argue, it’s quite clever to [Otter heard fake Kevin] piss off this number of people, you’ve got Vietnam, you’ve got Brunei, Indonesia, Philippines and Malaysia, because they claim, just about all of the south of the South China Sea, and the 200 mile extended Economic Zone, which puts it actually beyond Malaysia.
And you can see now with the Americans trying to force in flights in the area, the Philippines as well. But of course, they’re all frightened, the smaller countries are coming up against China because the action the Chinese can take in terms of your trade. To which I would cite Australia, where already Chinese action that has impacted on their trade, because they threw out Huawei as a as an operator for 5G, just as United Kingdom has now done.
So, you’ve got disputes in India as well, over the Northeast around Assam and Sikkim and Bhutan, Kashmir is an Indian-Pakistan problem isn’t it? Well, no actually 30% of Kashmir was taken by the Chinese to, direct translation, “look after it”, then there are disputes with Kazakhstan, Tajikistan, and I feel very sorry for the Mongolian so a few years ago, Chinese announced that all Mongolians are in fact Chinese. The Mongolians said, “No, we’re not.” They said, “Well, if you’re not Chinese, you’re Russian.” Oh bugger – doesn’t give them much of a choice really.
Colonialisation through commerce
So, anyway, that’s, I suppose slightly beside the point, China is asserting itself. And it’s asserting itself after what they would say is 100 years 1830 to 1940 so under the 10 years of humiliation, where the Western powers and Japan are all nibbling away at concessions in China, which we probably called colonies and we’re most familiar to us is probably [Otter heard village restaurants your] Hong Kong, but the Germans, Austria, Hungarians and Belgians, Americans everybody had a bit, and taken advantage. The British took it one stage further and decided that actually drug peddling was a good idea. And we grew opium in India, and we ended up fighting two Opium Wars, to ensure that the Chinese allowed us to trade opium into China, somewhat embarrassing as a history.
Anyway, so what are you announcing with China and you can see this particularly throughout Africa and I was in Uganda last year, one of my old hunting grounds, and you see the amount of Chinese investment going in there and what they have a habit of doing is coming in low cost loans initially, and the cost goes up, the country, for whatever reasons, then finds itself, sometimes the corruption sometimes not, can’t service the debt, and the debt is then referred back to and is then taken over by another Chinese institution.
A classic example of this was Sri Lanka, where the Chinese announced to the Sri Lankans, “You need another port in southeast Sri Lanka.” I don’t know if you’ve been to Sri Lanka but southeast Sri Lanka’s not a lot, except a couple of elephants wandering around, but they built the port and raised their finance. The Sri Lankans found they couldn’t pay for this. So actually, the board was then taken over by the port of Shanghai, which is just a body of the Chinese government, and what is so strange is of course this port just happens to fit nearly all of the Chinese fleet in the Indian Ocean. And who does that upset? Well, the Indians, because the clue’s in the name it’s the ‘Indian’ Ocean, not the Chinese ocean, so you can see what’s happening here.
This is colonialization by another route. Whether you approve it or not, that’s not the issue, that’s actually what’s going on. The good side of it is they are seeing investment going to these areas, the bad side of it is the influence, and eventual ownership will be transferring, so we need to be very careful of this.
Trump and China
So, be wary of what you’re being told. The trouble is, you’ve got Trump alone trying to deal with Chinese by trying to use a hammer. That’s not how you negotiate with the Chinese. And that maybe is how you negotiate with other people where you can wave your finger and shout at them. The Chinese, you do it quietly, round the back, sort it out so no one loses face, and you get the agreement. Everything that Trump has been talking about is not new. Intellectual Property disputes and things like that have already been discussed and some of it’s already been addressed. In terms of manufacturing and unfair trade and things like that, well actually, to a great extent actually, that’s benefited the US, does the US really want to go back to low cost manufacturing or lower cost manufacturing, the answer is, no, it doesn’t.
So, I’m afraid it’s somewhat simplistic arguments on Trump’s part, which has actually caused a lot of damage to America, American industry, and to part of the economy. So, China is a big issue. You can’t ignore it. Well second largest economy, and it is growing. And so you have to handle it very carefully indeed, what you don’t do is just write a lot of tweets and insult everybody, that doesn’t work.
What’s the good news?
Derek – Okay, we better turn some to some good news now, Justin, before we wind up the recording and throw it open to everybody. So, you and I are very positive people we believe in the good news, etc. So, what have you got for us? And will you make some forecasts for when I ask you back in at the beginning of October, we’d like a few forecasts.
Justin – Okay, we’ve been on some of this before and you can see what’s happening. Two obvious things; one is the impact of technology and how that’s changed so businesses are fundamentally changing the way that they’re operating. So, banks and others, and so you can make use of that as an opportunity in terms of not, I don’t mean just the Fang companies, you know the Facebooks and the Googles all of those ones, with that, we know that story. It’s the next generation of technology, which will be interesting there. Look at those businesses coming through, and you know, they’ll take some investigation to try and look at those and see which ones are really cutting it through and find a little area they can actually prosper for, that’s one area, the technology.
The other area of that is the localisation, companies are looking to reduce their supply lines. That does not mean that Apple’s going to move its production and from China, from iPhones to Isleworth, but it does mean that actually other companies will be saying, “I don’t need to run the risk of long supply chains, particularly if there’s going to be another outbreak of the virus or something else. I want to de risk my business. So, I want local suppliers.” And again, the opportunity there I think will be very interesting.
Now, one third area, and I’ll shut up. There’s also the issue of things which are green, and environmental issues. Two to three years ago, no one really wanted to know, now we’re all aware of it. And people will often say, “I want a portfolio, oh, by the way, can I have an environmental bit, as well,” almost a bit of an excuse to say, “Well, I’ve done my bit and I bought some unleaded petrol.” Now that’s changed. Now you actually you get people saying, “Actually I want to make sure everything I’m doing is working to help, and make sure it is positive towards the globe, and in terms of that climate and such like,” so fundamentally changed.
So, take oil companies. If you’re an oil company, and you do not have a very clear proposition as to how you’re going to manage oil and alternative fuels over the next few years, then you will actually find yourself being thoroughly spanked for it. One of the reasons that Aramco, the Saudi Arabian oil petrol company, is being floated is quite rightly they realise, they’ve got an asset which in 100 years will be worth close to zero, likely, so get the money for it now. BP were laughed at five years ago when they changed their, their brand name from British Petroleum to actually Beyond Petroleum, everyone laughed at them and they dropped it. In reality, that’s exactly what they’re doing. And we can now see that actually that environmental energy production has moved from the side-lines, it would be really very significant indeed, and also from being marginal also being from having a cost, actually now providing also something which is profitable. And there’s a lot more to be done there, but it’s not just that production or delivery, it’s the impact it’s having on companies themselves.
So those are three key differentiators and issues, apply that and you’ll start finding the number of companies you’re dealing with are coming down to a smaller number, and then carry out your due diligence as to whether you think they’re the right business, and the right growth areas. You can see some which are obviously going to be really struggling and will fail. Quite a lot will fail, will be the likes of the airlines, because they have a high cost base and going to be very difficult indeed so the likes of British Airways, didn’t take much of a forecast to know that Willie Walsh, was going to run it into the ground and take every opportunity here to cut the costs, get rid of the planes that don’t want, get rid of the routes and get rid of the staff and renegotiate all of that. If you’re a keen supporter of that, then he’s done exactly what you would expect. But that has had obviously huge impact on not just the staffing but also everyone related to it. But most of those airlines, unless they are flying their government flag and the government’s willing to support them are going to find it very difficult, and quite a number of them won’t be there.
What about the FTSE?
Derek – Yeah, no, absolutely. And there’s 11 cruise ships parked off the south coast of England, owned by Carnival and the few others, knocking around now what about a forecast or two? I’ve just looked up the FTSE 6,032.85 10 seconds ago. What about at the beginning of October?
Justin – Good god I haven’t got a clue. But with all of this, there are those who don’t know and those who don’t know they don’t know. What you will remember, actually, of course with the greatest level of return you will get, and this has weakened considerably I grant you, it’s not just the price of the shares but the compounding of the dividends that you’re getting of the shares, which gives you the long term value, which quite right you turn around and say, hang on, “Dividends have been slashed, and the amount of dividends getting much lower than you used to be.” That’s true. But hopefully, as the economy will eventually improve, therefore, you’re going to see some, some improvements in that overall return.
So, I am bullish in the fact I assume the world isn’t going to come to an end, but it’s going to be very difficult. This is going to be more difficult I think than most have actually thought so far. Some people have been very bullish, but if I see a FTSE 100, at the wrong end of 5000 heading towards that I’m going to be a buyer on that because there’s some very good companies in it, and they’re not British, they’re global FTSE 100 is not a British index. It’s a very good global measure. But so very simply that’s going to be an interesting one.
The question is how do we get the bad news out now, and how much more is there to come? Do you think there’s gonna be a second wave or not? I think most people probably think there is. How are those companies in a position to be able to manage it going to handle their way through it? So, the moment I’m seeing, probably, if it gets down to 5000 or so maybe a little bit below that, that’s a cracking good buying opportunity, but I could see easily this market going back over seven quite easily but I don’t think that’s going to be sustainable for long. It’s going to be in this sort of six, six and a half thousand range I think for some time, until you can start seeing a coordinated global recovery.
And at the moment with the current US leadership, we have to get that election out of the way, and you’re gonna have to see that how the discussion is going to go with Chinese trade and European trade. It’s going to take, it’s a long hard route, and Europe has been almost side-lined at the moment, and remember the fundamental flaws in their currency is still there, and going to cause problems unless they’re willing to actually grasp that.
So, I am positive, on the basis that companies will adjust, they will make money, there will be better returns, and if you’re seeing some significant discounts, then if you just want to buy the index, buy it when it’s at a cheap level, but be prepared for the fact that actually it’s going to be a very bumpy ride over the next few years. The bit I find, I always make sure every year I’d have a bit of cash put on one side, precisely for that. I’m not going to get the bottom of the market, no-one ever does. What you can do though, is when you’ve got a good asset, and you see it a discount, just take some of it, don’t and try and be greedy, just take advantage of that and be willing to sit on it.
Questions and comments
How did Woodford get away with it?
Derek – Fantastic, couple of questions in the box if I may ask you these. I was thinking this one and Will Kintish asked it, “How did Woodford get away with it for so long if it wasn’t obvious that’s what was happening,” and I thought the commentators or the newspapers the quality papers, that’s what they’re there for, in a way?
Justin – Oh. Seriously, they didn’t want to know, and I was having discussions with the likes of AIan Cowie [?] and the others, they were saying, “Take a look at the performance, it has been really good.” How many other examples, do you have to go through where we’ve seen examples which are really very good, we had even the head of the New York Stock Exchange find itself in a position running a perfectly good fund, actually that was NASDAQ, turned out in fact, of course it was completely false. And in terms of Woodford, no one was willing to believe what was actually going on underneath it, because he had such a good track record, but as I have mentioned earlier, you look underneath and what he was investing and what influence he had over that share price, meant that he was actually trading in mud. And so, when there was going to be some difficulty, he couldn’t get out of it, and was going to be difficult. Plus, the fact you then find yourself paying more for the benefit of that fund. You then have companies like Hargreaves Lansdown who promoted it in their sort of tip sheet, and allow you to buy a special particular subset of the shares, subset of the fund rather, which has got a higher charge on it. They were making more money out of it!
And to me, talking to the regulator about it, saying, “Look, that is an abuse of the system.” But I’m afraid our regulators are asleep on the job. You only have to look at this year, the appalling activity was going on outside the old British Steel factories, where you had people with their pension money, the last, their only pot of cash, being ripped off by not IFAs, just FAs, and people actually providing – really just nicking their money and the regulator did nothing. They will say, “Well show me an example.” It’s there, there’s the news that so you can see them there!
So, I’m afraid in terms of regulation, it’s nice to have regulation, but I’m afraid, a lot of us are going to have to use our own cynicism to be able to make sure we don’t get caught out with these things.
On Regulators
Derek – That is dreadful, because we are paying for the regulator. Yeah, we’re paying for that we’re locking up our hard-earned cash, hard earned pensions, and they’re not doing their job.
Justin – No, they’re not, and why, because actually, what you’ll find is, they don’t.
In America, they’re very good regulators are much better, why, because you’ll find they recruit ‘the best’, and they’ll get really good people and they’ll pay them a lot of the money to be there because actually if you want someone to actually find you where the nasties are find somebody who’s running the nasties.
And so you’ll find some really good quality people, whereas in this country, you don’t aspire to get into the regulator, that’s not something you know is necessarily important on your CV, where it goes it should be. They should have, not just people who are from the industry, but really good people in there, also people who have the right attitude that there is a thing about doing the right thing, behaving properly and realising it is a privilege to look after other people’s money, not a right. And I’m afraid the industry has too much self-pride and too much ego to actually admit when it gets it wrong, and to realise that they have to try and change. I found this when I had to resign from Barclays again, when Barclays, actually the firm that became Barclays stockbrokers, they managed to introduce an inactivity fee. So, you get charged for doing something, then you get charged for doing nothing! Brilliant! At that stage, I left.
What about crypto currencies (and China)?
Derek – good man! We are both getting accused in the chat box of being grumpy. We had Jeremy Wilson on last week, talking about crypto currencies and the Belt and Road initiative, can you say anything about crypto currencies?
Justin – the Belt and Road – that is a wonderful Chinese initiative to try and make sure that there is more trade operating with China. China has actually been moving – I remember Trump was saying, “China should get out of low-cost production.” He is not paying attention – China has been getting out of, low-cost production for some time, moving it to low cost operational centres like Bangladesh, Indonesia, Hull and focusing much further up the chain.
If you look at the Chinese economy now, it is not a manufacturing economy. Yes, it makes a lot of the stuff, the majority of its economy is now a service economy, so changed dramatically, much more middle class in terms of its development. It’s still a very big manufacturer, yes of course it is, so it’s fundamentally changed. What China wants to do, whether it’s through infiltrating, that’s probably an overdramatic term, making sure strategically they’re invested into countries, by trade, by the Belt & Silk road, by loans and debt, by technology, Huawei and others, by making sure they are locked into areas, you could say that’s a spider’s web, or you could say it’s a good trading mechanism, depending on your point of view, the answer is actually it’s probably a combination of both.
As for crypto currencies, they sound strange and difficult to understand and unreliable, that’s because they are, and that’s because they are not currencies, they are a form of betting, they are not regulated at all. Some of them have gone up, Bitcoin has gone up, there are some others that have done very well as well, and they have gone down dramatically. Actually, they’re a mechanism for dodgy parts of the market to hide their transactions, and I’m afraid I don’t wish to be a part of that and I would not recommend that anyone participates in that at all.
If you want to get involved in currency trading that’s fine, there are lots of currencies you can trade in, you can see them go up and down, they are nice and liquid. Bitcoin you have no control over whatsoever, it’s environmentally dangerous, it costs a huge amount to run, just computing power alone just on that basis, I see very little upside to that.
Where is I do see upside for good businesses who are adapting to the new economy, the new environment, and have the opportunity to grow and I am coming across a lot of those at the moment, but they need the help in trying to adjust to the new world, as of course, day by day we see it slowly developing, and of course it may easily go back again if we get this ubiquitous second wave. But you can see how the good companies have already adjusted and changed and they’ll have to keep on doing so and that provides us with the opportunity.
Ending the recording
Derek – Fantastic, Justin, thank you for your time today, will you stay on when I stop the recording and answer any other questions? Three things before you go; number one will you come back and join us in October, tell us what you think about Brexit, Mr Trump’s re-election, and anything else that’s exciting that’s happened in the two months in between?
Justin – Mr Trump’s re-election! Oh my God! Right, okay, yes, of course and I shall be happily embarrassed at the fact I got the FTSE wrong, I’d be delighted, because the questions your group come up with are fantastic, there’s no such thing as a stupid question, just many stupid answers, as you probably found out last time.
Derek – Justin Urquart-Stewart, thank you for joining us, we wish you all well with Regionally and we look forward to seeing you shortly.
Justin – Great pleasure, thank you very much.
Recording ended.
You can find all of Derek Arden’s Lockdown interviews on his YouTube Chanel