Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Neil Woodford off to pastures new. UK set to be hub for investing in China. China seems more determined than ever to keep a cheap yuan. Apple and Google prepare for next launches. US faces Armageddon
Neil Woodford off to pastures new
Let’s face it, Neil Woodford has been a success. But of late, as the cliché goes, he has been a victim of that same success.
He called the dot com crisis. He shunned bank stocks during the boom years leading up to the banking crisis. He was slated for his decisions at the time, yet his critics must have very funny looking backs of their heads, for they must surely be laughing on the other side of their faces today.
Since October 1990, Woodford’s INVESCO High Income fund has made gains of 1,725 per cent. If only we had all put our money in that fund back in 1990.
But that, in a way, has been the problem. With the benefit of hindsight, many investors said that the Woodford strategy is brilliant, and piled money into the funds he managed. But when you start managing the huge volumes that Mr Woodford manages, two things happen. Firstly, when he sells or buys stock, the sheer volume of buy and sell orders affects the price of the asset in question. It is Heisenberg’s Uncertainly Theorem; at the atomic level, the act of measuring something changes the thing you are measuring.
Secondly, because of Woodford’s success, many investors began to watch him carefully. His investment decisions became rapidly discounted by the markets. That, in part, is why the famous fund manager has not been seeing quite the returns of late that we had become used to.
Bull: So Mr Woodford is off. He is to form his own fund, and for the time being at least, he may not suffer from the same problems that began to haunt him at Invesco. Mr Woodford will enjoy the benefit of being small again, unless he starts to do well that is, in which case expect the same old problems to emerge at a later date.
Bear: What about regression to the mean? Who is to say that in the long run, Neil Woodford won’t see his performance return to average? Besides, the policy that served him so well was one of being anti-bubble. He shunned dotcom and banks. Some approaches can be brilliant at certain stages in the cycle, but can back-fire at other times.
Question: But where does this leave INVESCO?
UK set to be hub for investing in China
You may already know, London has already been signed up as the place to trade the Chinese currency the yuan/renminbi in the West. Well, now it is the place to go to if you want to buy shares in Chinese companies.
It all comes as part of an agreement signed up by George Osborne and his Chinese counterpart Vice-Premier Ma Kai. In the joint statement following the meetings, Britain and China said: “Both sides welcomed this as an important step that cements London’s major role as one of the most important global centres for RMB (renminbi) trading.”
According to some obscure organisation called the HM Treasury: “London has already established itself as the Western hub for offshore RMB trading, as part of a partnership with Hong Kong and following an earlier agreement between Britain and China to support London as a RMB centre in September 2011.”
According to the Treasury release: “London will be the first place outside greater China to have been granted an RQFII quota. Until now investors from London have gone through counterparts in Hong Kong before being able to invest in Chinese shares and bonds, potentially leading to higher costs. London’s initial quota has been set at 80 billion RMB.”
It was also agreed that the Prudential Regulation Authority will begin discussions with Chinese banks in London to enable them, for the first time, to apply to establish wholesale branches in the UK, allowing them to scale-up their business activities in the UK.
It is good opportunity for London, and a good opportunity for investors wanting a slice of China. But not all are impressed.
The ‘FT’ quoted one US bank chief as saying: “It is extraordinary to treat Chinese banks differently.” He said: “It’s very inconsistent. This is just a crazy lovefest.”
There is also talk that UK politicians are putting dealing with China over regulatory issues. To run it past you again, the UK government has agreed with China that the INDEPENDENT Prudential Regulation Authority “will begin discussions with Chinese banks in London to enable them to…” It’s all a little odd, because the regulator has been pushing for foreign banks to operate in London via subsidiaries, with their own capital buffers, which is pretty much the opposite of what has been agreed by Mr Osborne and Mr Ma.
But hey ho, let’s get China on our side, no matter what.
China seems more determined than ever to keep a cheap yuan
The dollar value of Chinese foreign reserves rose by $163 billion in Q3, and a jump that Capital Economics called “astonishing.”
From one point of view this is a good sign. It supports the view that China has been immune from recent shenanigans in Asia – with money flowing out of many countries such as India and Indonesia, as markets fear the imminent tapering of US quantitative easing.
But it also seems to provide evidence that China has no intention of relenting on its policy of maintaining a cheap yuan – a policy which some US politicians seem to think is the cause of all their ills.
A report from Capital Economics by Mark Williams and Qinwei Wang China said: “China’s policymakers remain deeply uncomfortable with allowing market forces a say in determining the exchange rate at times of uncertainty.”
Apple and Google prepare for next launches
The invite from Apple was for a press conference on October 22. It said: “We still have a lot to cover.”
Rumour has it the company will unveil updates to its tablets and a new Mac. The company is doing a good job of keeping us waiting for the next killer idea, and if the rumour mill has this one right, October 22 won’t end the wait.
Is the delay from Apple in releasing its next change-the–world-product, because it is just trying to get it 100 per cent right, or because there is no new change–the-world-product in the pipeline? Steve Jobs is supposed to have said, during the latter months of his life, of his designer Jonathon Ive that “Jonny has cracked it”. But cracked what? For all we know it may have been a new high score in Angry Birds.
Meanwhile, the same old rumour mill has churned out talk about Google. The talk is that the company is going to launch a new smart watch next month, code named GEM.
The big question is: will the product be better than Samsung’s rather disappointing effort? We are still awaiting solid evidence that smart watches will be half the products that the hype says they will be.
Or has Jonny cracked the riddle of creating a watch that becomes even more must-have than the smart phone. Investors must be hoping that Apple’s designer superstar, upon whose genius much depends, has followed the advice of the analyst Chuck Berry, also famous for his music, who once opined: “Go Johnny go, Johnny B. Goode.”
US faces Armageddon
What have US credit and the apparent condition of a musician back in the 1980s called Madonna got in common? Answer: they are (or were in the case of the singer) virgins.
The US has not defaulted before. And as we get closer and closer to the October 17 deadline, markets are beginning to fear that this time it will happen. Credit ratings agency Fitch has threatened to remove the US’s triple A credit rating – which is extraordinary. That is to say extraordinary that the US still has the triple rating, not that Fitch is threatening to remove it. It is akin to the police saying to a murderer, if you keep committing these crimes we will start watching you a lot more closely. Not that US politicians are murderers, but they do seem to be close to murdering the US economic recovery.
Now Ken Rogoff , former chief economist at the IMF and the man who co-authored the paper suggesting that once government debt rises over 90 per cent of GDP growth falls, has said the US is flirting with “financial Armageddon.”
If the impasse continues, suggests the prof, the US may make social security payments by IOUs, or so he told the ‘Telegraph’. Will IOUs become the currency of the future? But how can the US issue these things if cannot raise its debt ceiling? Will the IOU say “We will pay you $x,000 on the condition that Congress stops acting like a bunch of imbeciles.”
Anyway, getting back to the key point here, Professor Rogoff said that if the US does default, “its credit virginity will be lost.” And if that happens, it can never be regained.
Maybe in 20 years’ time, the US will be a lot like Madonna today. That said, the singer’s claims from the 1980s always did appear to be ‘virgin’ on the ridiculous.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees