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Time to get cautious?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
sackofspuds
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Time to get cautious?

#449192

Postby sackofspuds » October 10th, 2021, 11:25 pm

I've been concerned about the risks of the following:

    High inflation that doesn't prove to be transitory.
    Contagion from China's attempts to slow their property market. Not just direct contagion from the collapse of Evergrande etc but the knock on effect on China's GDP. Property sector is around 30% of GDP there versus 6% in the US.
    Energy crisis - China, India, Europe
Interesting podcast here with an interview of James Ferguson from MacroStrategy Partners:
https://moneyweek.com/economy/603962/ja ... -very-real

To summarise, he says that if treasuries go to 4% - which is very possible if inflation doesn't subside (and they were at 3% a few years ago) - any stocks on a PE of 25+ get hammered.

His broad strategy would be Silver (or Fresnillo) and shares on PEs closer to 12 or 13.

So pretty much what a lot of people are talking about, a shift from growth to value. He points out that is normal strategy would be to do nothing and just wait things out but this time he sees it as a very fundamental change.

Made me nervous, I must say.

I also think that if the US equity markets correct by say 20% or 30%, shares that are on PEs of 12 now won't be immune.

Yeah, I know trying to time the market is considered daft but I cashed out a chunk of my portfolio in Feb 2020 and bought back in after 23 March with some excellent results.

Seriously thinking of liberating some cash now.

Anyone doing similar?

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Re: Time to get cautious?

#449204

Postby TUK020 » October 11th, 2021, 8:08 am

Have pretty much stopped all divi reinvestment; watered down version, for much the same reasoning.

monabri
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Re: Time to get cautious?

#449208

Postby monabri » October 11th, 2021, 8:40 am

The World "paused" 18 months ago ( certainly seemed that way). Using Vanguard's VUSA fund as a proxy for the S&P 500 US stocks, the fund price fell by ~20%. So, how do we get a 20-30 % correction if we "only" get a 20% Covid induced fall?

Seems to me that the only time a crash isn't imminent is when we are in one and it's doom and gloom forever.

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Re: Time to get cautious?

#449209

Postby Urbandreamer » October 11th, 2021, 8:43 am

I'm not actually selling, as I see inflation as a real issue with respect to cash.

That said, I'm struggling to buy and actually have an uncomfortable (for me) amount in cash at the moment.
It's a combination of dividends that have not been invested, my regular investment contribution and my current account.
I'm even considering putting some of it in Bitcoin, which would be a first for me. The trouble with that Idea is the amounts would be so small as to achieve very little.

The "mood music" suggests trouble ahead.

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Re: Time to get cautious?

#449210

Postby JohnnyCyclops » October 11th, 2021, 8:50 am

Help me out a little, please.

Inflation.

Not been investing during an inflationary period. What's the BROAD position in relation to both equities and bonds please? I know bonds do have a relationship to inflation. I think it's as inflation rises, bonds lose future value so the yield 'demanded' is higher, and therefore the price of bonds is pushed down. But, does that mean money that previously went to bonds now goes into equities, pushing those prices up? Firms (equities) will have different ways to mitigate the impact of inflation on both costs and/or prices.

Hopefully builds on the OP (who listed inflation first) and not a thread hijack!

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Re: Time to get cautious?

#449212

Postby monabri » October 11th, 2021, 9:02 am

JohnnyCyclops wrote:Help me out a little, please.

Inflation.

Not been investing during an inflationary period. What's the BROAD position in relation to both equities and bonds please? I know bonds do have a relationship to inflation. I think it's as inflation rises, bonds lose future value so the yield 'demanded' is higher, and therefore the price of bonds is pushed down. But, does that mean money that previously went to bonds now goes into equities, pushing those prices up? Firms (equities) will have different ways to mitigate the impact of inflation on both costs and/or prices.

Hopefully builds on the OP (who listed inflation first) and not a thread hijack!


https://www.ig.com/uk/trading-strategie ... ket-210423

(Don't buy oranges...invest instead).

Edit: it will be interesting to see if HYP type shares gain ground after years in the doldrums.

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Re: Time to get cautious?

#449213

Postby BT63 » October 11th, 2021, 9:17 am

JohnnyCyclops wrote:Help me out a little, please.

Inflation.

Not been investing during an inflationary period. What's the BROAD position in relation to both equities and bonds please? I know bonds do have a relationship to inflation. I think it's as inflation rises, bonds lose future value so the yield 'demanded' is higher, and therefore the price of bonds is pushed down. But, does that mean money that previously went to bonds now goes into equities, pushing those prices up? Firms (equities) will have different ways to mitigate the impact of inflation on both costs and/or prices.

Hopefully builds on the OP (who listed inflation first) and not a thread hijack!


If bond yields rise, interest rates often follow.
That makes corporate and consumer debt more difficult to service, reducing profitability and consumer demand.

Higher interest rates also close the gap between perceived equity returns and cash/bond returns, making equities less attractive. In the last few years 'TINA' <There Is No Alternative> has been the buzzword to justify paying very high prices for any kind of return. Lots of today's asset prices are dependent on QEternity and TINA.

It is a dangerous situation but it could continue for longer than most can tolerate betting against it.

My thoughts are that inflation could be a problem but eventually the bursting of one of the many bubbles/distortions caused by QE/TINA could bring powerful disinflationary forces again.

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Re: Time to get cautious?

#449214

Postby sackofspuds » October 11th, 2021, 9:18 am

JohnnyCyclops wrote:Help me out a little, please.

What's the BROAD position in relation to both equities and bonds please?


That podcast is well worth a listen. 99% of it is about bonds. The strategy recommendation is in the last 5 mins. Bear in mind that the bond market dwarfs the equity market. He makes the point that traditionally bonds yielded 3% above inflation. That would imply 7% bond yields. That seems extraordinary, hence he assumed a figure more like 3% or 4%. That US treasury yield is a baseline for all other investments including equities and corporate bonds.

Essentially he predicts a sea change in equities whereby what was doing well does badly and vice versa.

This switch to value has been talked about for months. I can't help noticing that the Nasdaq is down 4% in the last month and the likes of Polar Capital Technology Trust is down 5%.

I'm less inclined than I used to be about riding it out (retirement getting closer).

I mentioned timing the market. When does asset reallocation become timing the market, I wonder?

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Re: Time to get cautious?

#449220

Postby NotSure » October 11th, 2021, 9:46 am

sackofspuds wrote:
I'm less inclined than I used to be about riding it out (retirement getting closer).

I mentioned timing the market. When does asset reallocation become timing the market, I wonder?


I wouldn't necessarily call what you are contemplating "timing the market". You would be simply adjusting your portfolio risk profile to match your (new) circumstances. It's been a good 18 months/12 years for equities. No-one went broke banking the occasional profit.

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Re: Time to get cautious?

#449230

Postby Wuffle » October 11th, 2021, 10:14 am

I would make the point that retirement IS an asset allocation decision.
There is a man in B&Q in stoke with the nametag 'Grandad' (yes really) who is knocking on 80.
He used the big saw for me recently, and we engaged in a brief exchange about whether or not he was retired.
He insisted that he was, I suggested that he was turning up and getting paid, so he wasn't.
Still, he knew inflation protection when he saw it.

W.

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Re: Time to get cautious?

#449242

Postby simoan » October 11th, 2021, 10:53 am

sackofspuds wrote:Interesting podcast here with an interview of James Ferguson from MacroStrategy Partners:
https://moneyweek.com/economy/603962/ja ... -very-real

To summarise, he says that if treasuries go to 4% - which is very possible if inflation doesn't subside (and they were at 3% a few years ago) - any stocks on a PE of 25+ get hammered.

His broad strategy would be Silver (or Fresnillo) and shares on PEs closer to 12 or 13.

So pretty much what a lot of people are talking about, a shift from growth to value. He points out that is normal strategy would be to do nothing and just wait things out but this time he sees it as a very fundamental change.

Made me nervous, I must say.

Thanks for the link. Apart from buying precious metals for inflation protection, I really disagree with him on changing your equity position based on PER's. That is very broad brush hand waving stuff that is no use to anyone. It's also wrong. I take his point about risk being re-priced and his nod to Howard Marks with regard to the "history never repeats, but it rhymes" quote but some of these high PER companies are exactly the type of equities you want to hold in an inflationary environment i.e. companies with pricing power who can pass on input cost inflation to their customers, maintain margins and cashflow to continue investing, paying dividends etc. while you sit out the storm.

Why would you want to own something on a PER of 12 which is likely to be a low growth, low margin business with no pricing power that will have it's margins eroded to nothing, resulting in unprofitability and no cashflow for re-investment and dividends in such an environment? At that point you start worrying about low PER companies with highly leveraged balance sheets i.e. debt and possible contagion to the banks (all on low PERs 12 too!). It was a shame after such an interesting interview for his solution to be so ill considered.

All the best, Si

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Re: Time to get cautious?

#449243

Postby JohnnyCyclops » October 11th, 2021, 11:02 am

monabri wrote:
https://www.ig.com/uk/trading-strategie ... ket-210423

(Don't buy oranges...invest instead).

Edit: it will be interesting to see if HYP type shares gain ground after years in the doldrums.


I wonder how Apple got on.

A useful link, thank you.

One does need to buy the occasional piece of fruit (or bread, or veg), to get by.

EDIT - assuming HYP stocks have some link to value (PYADic variety) then possibly not in a bad spot with a market swing from growth to value.
Last edited by JohnnyCyclops on October 11th, 2021, 11:09 am, edited 1 time in total.

sackofspuds
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Re: Time to get cautious?

#449245

Postby sackofspuds » October 11th, 2021, 11:02 am

simoan wrote:Why would you want to own something on a PER of 12 which is likely to be a low growth, low margin business that will have it's margins eroded to nothing, resulting in unprofitability and no cashflow for re-investment and dividends in such an environment?


I think it depends on the individual company. Read something interesting last night about Stagflation. For one thing, analysts disagree on what exactly it means. High inflation and high energy prices yes, but the 1970s had high unemployment too. That doesn't seem very likely. The companies that suffered most were those that were unable to pass on their costs fast enough. Consumer staples didn't do too well. Consumer services did much better. Obviously energy did well.

If you have a HYP like portfolio you could already be holding companies with low PERs.

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Re: Time to get cautious?

#449247

Postby JohnnyCyclops » October 11th, 2021, 11:06 am

NotSure wrote:
sackofspuds wrote:
I'm less inclined than I used to be about riding it out (retirement getting closer).

I mentioned timing the market. When does asset reallocation become timing the market, I wonder?


I wouldn't necessarily call what you are contemplating "timing the market". You would be simply adjusting your portfolio risk profile to match your (new) circumstances. It's been a good 18 months/12 years for equities. No-one went broke banking the occasional profit.


Similar spot here. Early 50s. Most investments in company pensions, and most of those in equities that recovered well from Covid. Hence wondering if some rebalance from equity to bonds is in order, but a tad concerned that bond prices will drop (yields rise) if inflation takes hold.

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Re: Time to get cautious?

#449253

Postby simoan » October 11th, 2021, 11:33 am

sackofspuds wrote:
simoan wrote:Why would you want to own something on a PER of 12 which is likely to be a low growth, low margin business that will have it's margins eroded to nothing, resulting in unprofitability and no cashflow for re-investment and dividends in such an environment?


I think it depends on the individual company. Read something interesting last night about Stagflation. For one thing, analysts disagree on what exactly it means. High inflation and high energy prices yes, but the 1970s had high unemployment too. That doesn't seem very likely. The companies that suffered most were those that were unable to pass on their costs fast enough. Consumer staples didn't do too well. Consumer services did much better. Obviously energy did well.

If you have a HYP like portfolio you could already be holding companies with low PERs.

I don't have a HYP but if you did, which typical HYP companies would do well? Unilever, banks may do OK as long as bad debts don't become an issue, maybe Big Oil and Miners as commodities should do OK? But you can hold all these without having a HYP! I can't think of any other sectors as they tend to have low margins, terrible balance sheets and no pricing power because they operate in competitive industries. Surely in a world with Gilts or US Treasuries on yields of 3 or 4% all high yielding equities would be re-priced too? Any fixed income and Utilities would get trashed in that scenario! Insurance companies would get hit equally as hard as the market as the value of their bond and equity holdings dived too. How many HYPs have any significant exposure to precious metals? None, I'd suggest, other than maybe a small amount of exposure gained via BHP or Rio Tinto.

All the best, Si

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Re: Time to get cautious?

#449255

Postby Urbandreamer » October 11th, 2021, 11:49 am

JohnnyCyclops wrote:Similar spot here. Early 50s. Most investments in company pensions, and most of those in equities that recovered well from Covid. Hence wondering if some rebalance from equity to bonds is in order, but a tad concerned that bond prices will drop (yields rise) if inflation takes hold.


Late 50's, planning on retiring in less than 2 years. However average male life expectancy predicts that I need to fund 30 years and if I'm lucky more like 40 years. Bonds are not my first choice for an investment of that duration. Then again what do I know?

I'm going to read Ruffer's anual report and consider if I want to invest in them. Their NAV and price bairly responded to covid at all. My portfolio saw a 40% drop, though it's recovered nicely.

A brief glance seemes to suggest that long term Ruffer perform slightly better than the total return on the FTSE all share, but with a lot lower volatility. The only fly in the ointment is the yield. I'd have to adopt a stratergy of creating income through selling capital. Ughh.

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Re: Time to get cautious?

#449273

Postby simoan » October 11th, 2021, 12:59 pm

BTW the latest Howard Marks memo covers his thoughts on inflation: https://www.oaktreecapital.com/insights ... arks-memos

Definitely worth a read.
All the best, Si

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Re: Time to get cautious?

#449274

Postby sackofspuds » October 11th, 2021, 1:00 pm

simoan wrote:Surely in a world with Gilts or US Treasuries on yields of 3 or 4% all high yielding equities would be re-priced too? Any fixed income and Utilities would get trashed in that scenario!


Yup, I agree. If the NASDAQ went down 30% in short order more or less everything gets trashed. The opposite to a rising tide floating all boats. However, if I buy something yielding 5% and the divis hold up, I still get the 5% on my original price, even though new buyers lock in a higher yield.

In reality, it's cash that you want in that scenario so you can buy back in.

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Re: Time to get cautious?

#449277

Postby sackofspuds » October 11th, 2021, 1:10 pm

Urbandreamer wrote:A brief glance seemes to suggest that long term Ruffer perform slightly better than the total return on the FTSE all share, but with a lot lower volatility.


I also like RIT Capital Partners (RCP) but between March and Feb 2020 it went down nearly 30% like many other shares.

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Re: Time to get cautious?

#449281

Postby monabri » October 11th, 2021, 1:27 pm

Is there some risk level that we ( Lemons) understand or are concerned about that the market hasn't already priced in?

The politics of interest rates rising by even small amounts need to be considered....what effect would that have on the housing market ( I've sold out of Taylor Wimpey as I can see margin erosion from labour & material cost increases and pressure on affordability from any inflationary increases). Which is more likely, the BoE jacking up interest rates by 1% or in a series of smaller increments ( say 4 x 0.25%).

I'm surprised that the US mkt recovered so quickly - possibly too quickly and thus reality might be setting in for that market. What happens in the UK might be influenced by what is happening in Germany, I believe there is more correlation between these two markets than US: UK (??).

Mind you, we're sitting in a country that panics over bog rolls and pulls knives on folk when they can't get fuel for their cars....we seem prone to panic so , no doubt, when the US sneezes...


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