Market Update 27th March 2023

Don’t be a hero

Imagine an investor who indulged in a little too much turkey and stuffing and entered into a prolonged post-Christmas doze. If they awoke and checked today’s papers, they would most likely start to panic. And not only about the date in the top right corner.

Headlines about a splintering financial system and bank collapses would cause our imaginary friend to frantically flick to the financial pages with a heart rate significantly higher than that maintained during their hibernation. At this point, they would question if they were still dreaming. Most of the main indices in the UK, Europe, Asia and North America have delivered a positive year to date performance.

How can this be, if we are on the cusp of a repeat of 2008-9 – as some in Fleet Street would have you believe? Well, the short answer is because we’re probably not. As I have said before in this column, the UK banks are generally much healthier than in 2008. Logically, that would cause us to see this as a buying opportunity in the sector. But we will not be jumping in with both feet. We are here to protect and grow client money, and regardless of one’s views on the sector just now, it is difficult to see how piling in to bank shares now fulfils the first of those two targets. It’s no time to be a hero. Quality stocks with proven resilience feel a more comfortable fit just now.

Deutsche Bank is the latest bank under attack. This has been something of a problem child in the European banking space for a while, and it is not one we have followed or recommended.

I actually feel sorry for senior officials in these situations. When they are asked for comment, they have three choices. Option one is to say “yes, there could be a problem”. This is clearly not going to help the situation. Option two is to decline to comment. This leads investors and the public at large to assume the truthful answer is akin to option one. Thus, panic is created. Option three, the most widely adopted choice, is to explain all is well and there is no need to worry. The reaction here is similar to what we would expect to see on a transatlantic flight if the pilot unexpectedly takes to the mic to calmly explain there is plenty of fuel, the engines will remain functional for at least the duration of the journey and there is no reason to be remotely concerned whatsoever. My favourite example is at Premier League football clubs. You know there’s a change coming when officials are wheeled out in front of the media to deny any such thing.

Leicester City’s club spokesperson read the following statement on 7 February 2017.  “In light of recent speculation, Leicester City Football Club would like to make absolutely clear its unwavering support for its First Team Manager, Claudio Ranieri.” He was sacked within a fortnight.

I digress. The net effect of the recent banking jitters is to distort asset allocation. The latest Bank of America fund manager survey confirmed cash levels are now at 5.5%. That’s well above the historical average of 4.7%. Similarly, the latest American Association of Individual Investors survey showed optimism about equity markets is unusually low for the 45th time in the past 64 weeks. Pessimism reigns supreme. Those that believe it is best to be greedy when others are fearful, and that markets need to climb a wall of worry before peaking will be encouraged by this. Not many bull markets start with investors being over-confident. The problem is that it can of course get worse before it gets better.

However, the management commentary that accompanied the most recent results season was one of cautious optimism. Supply chains inertia is easing and inflation should start falling quickly. After a period of decline, estimates for corporate performance have therefore stabilised on both sides of the Atlantic. Hopefully this paves the way for some more positive revisions in the coming months.

We should also note that businesses are positioned very defensively. In the UK, the weighted average of net debt to EBITDA ratio is around 1.3 times. That’s lower than in each of the previous ten years. Progress has come via resources giants deleveraging and many other businesses having prioritised conservatism around the pandemic. But it doesn’t matter why the UK’s largest companies have not had such strong balance sheets in many a year, the fact is they do. Many also used the Covid outbreak as a chance to reset dividends. As a result, only 39% of last year’s earnings per share were distributed. In 2019, the last pre-pandemic year, that figure was 64%. A lower dividend burden is clearly a good thing. The expected yield in 2023 is still a not-too-shabby 4.2%.

George Salmon – Senior Investment Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.