The Daily Telegraph - Saturday - Money
Diary of a private investor
November was one of the best months ever for shares – and a Brexit deal could add 10pc more by the spring
What a fabulous month November was! In this diary at the beginning of last month, I wrote: “I think that people might look back at this moment – autumn 2020 – and think, ‘ Why on earth didn’t I buy shares then?’ ” I never expected to be vindicated so quickly and dramatically. It turned out to be one of the best months ever for shares.
The announcement by Pfizer that its vaccine was remarkably effective finally prompted the market to raise its head and look beyond the current misery to the delights of spring when most of this Covid trauma will be behind us. The FTSE 100 rose by 12pc. My portfolio, which was down a miserable 30pc at the end of October, recovered to be “only” 19pc down. I have still underperformed the FTSE 100 this year, but I have been gradually regaining ground. That is because I am heavily into the old- economy “value” shares that are having their day again after being put in the shade by fashionable, Covidimmune American technology stocks.
Lloyds Banking Group, for example, has recovered from 28p at the end of October to 38p as I write – a gain of 36pc. Paragon Banking has jumped 45pc. I have holdings in both.
What happens now depends quite a lot on the outcome of the Brexit negotiations. At the time of writing, the betting odds are 2/1 on a deal. Short odds, but there is still some risk of no deal. How would the market react in that case? My guess is that British shares would fall in the region of 5pc pretty quickly and remain under a cloud. But the fall would be sector specific. The utilities would probably be OK, but airlines would suffer. The pound would definitely fall. Shares of some European exporters to Britain, such as carmakers, could be hurt, too.
On the other hand, if there is a deal, I think the market will jump up initially and then continue going ahead. Foreign investors who have kept away from Britain for several years because of Brexit would gradually come around to
the idea that we are going to be all right. They would see that British shares are far better value at present than, for example, American ones, so they would move in. I guess that British shares would rise 10pc within three months.
How am I positioned at this moment of great uncertainty? I am almost 100pc invested and mainly in British companies. So my portfolio would be hit by a no- deal Brexit. But I think the drop in British shares will probably be overdone and I will be looking to doubledown on my British emphasis. I might sell overseas shares that are strong and put more into British shares.
In the meantime, I have completely sold out of gold. I had units in an exchange-traded fund and have sold the lot. I lost money on that investment. I bought them earlier this year on the basis that inflation was bound to return to Britain and the US because of recent increases in the money supply. I still think that is true, but timing is everything. At the moment, investors’ minds are on Covid and economic recovery from it. They have avoided shares all year, but now they can see light at the end of the tunnel, they’re buying shares again. To pay for them, they are selling
gold or, at least, not buying it. So gold is suffering from the switch back into equities. It is always painful to take a loss, but sometimes one must accept one made a mistake and move on.
I am still holding on, though, to my exchange- traded funds that “short” long-term US Treasury Bonds. They are designed to go up if long-term US Treasury Bonds go down.
My reasoning on this is, again, that inflation is bound to rise in the next year or two. But in the short term, I think government bonds will fall because of the return of faith in shares. The difference in yield makes shares tempting. On a long-term British government bond, the yield is currently 0.9pc whereas the yield on major shares is more than three times higher, at 3.1pc.
For now, the very short term depends on Brexit but the background music is this great switch back to shares. The vaccines have changed the situation and next year will bring a recovery in economic activity. But beyond that, I expect inflation to return and upset the applecart. The next two years will be a tricky business of trying to get the timing right as the investment world reacts, first to recovery and then to inflation.
‘Vaccines have changed the situation and next year will see a recovery in economic activity’