Like meetings in general, a lot of City events are a waste of time.
You don’t learn anything from sitting in a room for an hour that you couldn’t have gleaned from five minutes skimming the obligatory Powerpoint presentation. That’s why I don’t go to many.
But I made an exception yesterday for the annual Winterflood Investment Trusts conference. And I’m really glad I did.
We like investment trusts at MoneyWeek anyway (if you haven’t seen our model investment trust portfolio, log on to the website here and check it out). But there were some really good speakers, and it was fascinating to see how they were reacting to the recent turmoil in the markets.
I’d say there were three key points of interest that stood out to me…
Bonds are scarier than stocks – but also starting to get interesting
All of the managers presenting mentioned the recent market turmoil. But the one who seemed most actively excited/concerned by it was the bond fund manager.
On the one hand, he raised many of the points that we’ve made before in MoneyWeek – with yields so low, it doesn’t take much of a move in bond prices to wipe out all your income gains and leave you sitting on a loss, particularly in the “safest” bonds.
Anyone who invested in German bunds at their lowest-yielding point last April will have felt the pain from that one quite badly. So this is a market where “there’s no margin for error”.
On the other hand, the recent turmoil is starting to throw up some interesting opportunities in other areas of the bond market. While there’s likely to be carnage in the energy sector, we’re also looking at the sorts of yields on bonds issued by some big companies (BHP for example) that are starting to look tempting, frankly.
Put it this way, I came away from his presentation with the feeling that certain chunks of the bond market are finally starting to look interesting again. We’ll be investigating some of the best-looking opportunities in an upcoming issue of MoneyWeek.
Frontier markets could be worth a look
One of the most entertaining presentations was from BlackRock’s Sam Vecht. He runs a frontier-market investment trust (among several other things) and I have to say, I expected him to be rather gloomy.
Not at all. Turns out that frontier markets have been both surprisingly dull, and are currently surprisingly cheap.
That’s partly because Vecht seems to have done a decent job of being out of overly oil-dependent markets as and when necessary. But it’s also because they demonstrate very little correlation with any other global markets, including their emerging counterparts and also with each other.
Also, despite the last few years of “risk-on” behaviour, frontier markets have been steadily de-rated – ie they now trade on lower price/earnings multiples than they did, because investors are less keen to pay up for them.
I was also quite surprised by the attractive dividend yield – over 4% – on offer from the investment trust, BlackRock Frontiers Investment Trust (LSE: BRFI).
We’ve been bullish about various individual frontier markets in the past, (Vietnam for example) and again, it’s something I’ve made a note of to revisit in further detail in an upcoming issue of the magazine.
The City is worried about Brexit
Finally, it was clear that several of the fund managers who presented were concerned about Brexit. (Although you could tell from the questions that there were quite a few pro-Brexiters in the audience.)
That was interesting. It’s clearly borne mostly out of self-interest. The City is happy with the way things are, and it’s fearful of anything that could hurt London’s status as a key destination for global capital.
It’s also worth remembering that the City can be somewhat short-termist. In the short term, the status quo would be less disruptive. So if you’re not concerned about the long-run political picture (which is what worries me, and I think is the primary, sensible reason to want Brexit – see Merryn’s interview with Roger Bootle from a while ago), then “stay” is a no-brainer.
And of course, incumbent industries are often content with over-regulation and tricky paperwork. It keeps barriers to entry high.
One of the oft-neglected reasons that Big Tobacco has been such a great investment in the past few decades is because it’s such a protected business. Never mind the persistent “ethical” discount that some analysts point to as the reason for its outperformance – it’s got far more to do with the massive regulatory moat around the industry.
I’m not saying for a minute that a Brexit would necessarily lead to less financial regulation. But who knows?
In any case, I find it hard to see why leaving the European Union would hurt us on the foreign capital front. We’re still one of the most friendly jurisdictions for foreign wealth out there, despite recent changes to non-dom and stamp duty rules. There are few countries in the world where you’re less likely to have your money confiscated by crooked or avaricious authorities than in Britain.
As far as sterling’s recent weakness goes, I’d be far more inclined to put that down to a) retreating expectations of interest rate rises; b) the strong US dollar; and c) the reversal of petrocurrency flows (though I need to spend more time looking into this last one), rather than fears over an impending EU referendum.
Anyway – we’ll have more from Charlie Morris on the question of EU membership in the next issue of the magazine. Look out for that.
And just before I go – in light of all the havoc in the markets, if you haven’t yet checked out Tim Price’s concerns about how central bankers might take their meddling even further, it’s worth doing now.