II Today – Brexit countdown

A ringside view of global financial markets

Welcome

JD_book_1000Welcome to the II Today blog, which for the next few weeks will be solely dedicated to posting updates on Brexit – please sign up via the box on the right to receive updates. My focus here is purely pragmatic: tracking how the Brexit process is progressing, rather than pontificating or cheerleading about the merits of different solutions (God knows, we have had enough of that). For most people the reality of this seminal moment in UK history is about to kick in. The aim of the blog is simply to log and provide links to the most authoritative sources I track myself.  For those who don’t know me, I have been following financial markets for nearly 40 years, initially as a senior correspondent on The Times, The Economist and The Independent, more recently as an qualified investment professional and author/columnist for the IndependentFinancial Times and The Spectator.  Any views that I express here are entirely my own.    Jonathan Davis

Written by Jonathan Davis

July 1, 2010 at 1:15 PM

Posted in Publisher

Wise men warn while fools rush in?

The New Year has started well, with plenty of evidence that professional investors are continuing to rediscover their appetite for risk assets, with the price of equities, corporate bonds and high yield debt all heading higher. The charts for leading equity indices, including the S&P 500 and the FTSE All-Share, have been trending higher ever since Mario Draghi, the head of the European Central Bank, announced last summer his intention to “do whatever it takes” to prevent the eurozone from falling apart. He has every reason to be pleased with the response to his intervention, which to date has been effectively cost-free. Would it were always so easy! European stock markets, having been priced for disaster before, have led the way up as fears of the euro’s fragmentation recede. Volatility, as measured by the VIX, has meanwhile fallen to multi-year low levels.

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Written by Jonathan Davis

January 19, 2013 at 7:12 AM

The eurozone’s fundamental problem

For those with an interest in the interminable eurozone saga, this syndicated interview with the French president Francois Hollande is well worth reading. It sets out clearly the main current differences in approach between M. Hollande and Mrs Merkel as they set off for the latest European summit, which starts today.  As always the meeting will attempt to paper over the cracks between these two very different ideas of how greater political and fiscal union in Europe should be achieved. There is still a long way to go before a really durable solution that can guarantee the euro’s survival is reached (if indeed that proves to be possible).

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Written by Jonathan Davis

October 18, 2012 at 11:26 AM

Myopia in the stock market

We all know that private investors are typically scarred and scared out of owning equities by their aversion to incurring losses. Yet the scale of that aversion is staggering, according to some research recently reported by the Franklin Templeton fund management group.  Its annual survey of investor sentiment allows it to ask investors what they think has happened to the stock market each year, and then compare that perception to the reality.

So for example the proportion of the 1000-investor sample which thought stocks had fallen in 2009 was 66%. Yet the S&P 500 index in that year was actually up 26%. The comparable figures for 2010 were 48% (who thought the market had fallen) and 15% (the actual market rise). More than half the survey also thought stocks had fallen in 2011, when the market in practice was flat.

The fund manager’s theory is that these figures are testament to the behavioural bias which prompts humans to give undue importance to one bad experience – the 2008 crisis, which sent the S&P index down 40% – and ignore more favourable outcomes. Whatever the explanation, the data certainly helps to explain why so much money has flowed out of equity funds into bond funds since the crisis broke, in apparent contradicton to common sense and historical experience.

Written by Jonathan Davis

October 17, 2012 at 3:59 PM

A dissenting view on inflation

Has the Bank of England lost control of interest rates? You won’t hear that view from any official source, but it is worth listening to the economist Peter Warburton, the founder of the consultancy Economic Perspectives, whose often dissenting opinions have been more right than wrong over the past couple of decades. He argues differently in this contribution to the Shadow Monetary Policy Committee’s latest review of economic conditions, in which he warns about the incipient threat of price inflation. It is well worth reading: I suspect it will look very prescient when we look back in years to come.

It is becoming increasingly obvious that the Bank of England has lost control of UK retail borrowing costs. During the three years-plus that Bank Rate has been set at ½%, the average interest rate paid on banks’ and building societies’ notice deposit accounts has risen from a low of 0.17% in February 2009 to 1.83% in July 2012.

Admittedly, the quoted monthly rates have bounced around, but the average for 2012 is 1.41%. This is a measure of the average cost of retail funds to the banking sector; the marginal cost is closer to 3%. On the other side of the balance sheet, Santander UK has recently announced a 50 basis point increase in its standard variable mortgage rate, to 4.74% from October. Clearly, the level of Bank Rate has played no role in the evolution of market rates for the past three years. The MPC’s consideration of a cut in Bank Rate is perverse and farcical in this context. As and when the UK economic news flow permits, Bank Rate should be raised in order to reconnect it to the structure of market rates. However, with UK activity indicators currently erratic and weak, now is not a good time to do this. Read the rest of this entry »

Written by Jonathan Davis

September 4, 2012 at 9:41 AM

The risk of a short circuit in markets

Richard Burns, until recently the senior partner at Baillie Gifford, is now chairman of a range of the firm’s investment trusts, including Mid Wynd International, a special situations fund that holds positions in interesting companies that are too small to make a difference to its flagship funds. This is his most recent take on the investment environment, taken from the trust’s annual report. With the Eurozone crisis continuing to cast a shadow over events, and equity markets not obviously cheap, cautious and pragmatic investors (a type much in evidence in Edinburgh) are mostly marking time for now.

Repeated central bank stimuli have managed to contain, for now, what would otherwise have been a combination of Western debt deflation and deep recession. These interventions buy time, but not an indefinite amount. Policy making in the afflicted parts of the Western world appears to be running up against the laws of diminishing returns. Underlying sovereign balance sheets are deteriorating further meantime. What has happened is akin to stripping insulation from the bare economic wire – governments and central banks are that insulation. As time goes on, and in the absence of a more potent recovery, the risk of short-circuit increases.

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Written by Jonathan Davis

August 30, 2012 at 9:04 AM

An illusion of safety in bonds

Bruce Stout, the manager of Murray International investment trust, is another fund manager whose conservatism and preference for defensive high yielding equities has rewarded his shareholders well over the past few years. Earlier this year I heard him tell an investment trust conference that the most positive thing to be said about financial markets was they were becoming more realistic about the prospects for an early resumption of growth.

He sees little prospect however of any immediate improvement in the macro environment. These are his most recent comments on the markets, as reported by Citywire:

Recent respite in financial markets must be viewed with great scepticism. At the current time, when transparency is low, when harsh deflationary economic conditions are new to policymakers steeped in the past, and when the political establishment is clearly willing to indulge in perpetual bailouts regardless of the consequences, this is no time to let hopeful expectations cloud reality. We remain very cautious, defensively positioned and focused on capital preservation.

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Written by Jonathan Davis

August 27, 2012 at 5:20 PM

Ruffer: the right question to ask

The estimable and splendidly ideosyncratic private client fund manager Jonathan Ruffer, whom I profiled a couple of years ago in The Spectator, has some thoughtful points on the prospects for Europe in his most recent monthly investment review. Here is a short extract, in which he points to the underlying frailty of the European project, about whose future he is not optimistic:

The Treaty of Rome in 1957 was a great moment for the peacemakers, but now its architects are dead, as are pretty much all those who felt the visceral despair in the darkness of the late 1940s. That hope has been replaced with a sort of Communism: power divorced from economics. Just as Russia could not keep control when the figures didn’t add up, nor can Europe. It is only a question of time. So, when does it all end? I think it is a mistake to try and guess. Observers of 1980s Russia fell into two categories: those who thought things would continue as they were forever, and those who could see the pressure, the inconsistencies, and imagined that the crisis would strike a week on Thursday. Nevertheless, it is striking on my return to find how far the status quo has shifted in Europe since March. It’s the same tune, to be sure, but the violins have been replaced by cellos.

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Written by Jonathan Davis

August 20, 2012 at 4:39 PM