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3rd April 2019
Market Commentary April 2019

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Noes, Woes, Lows and Flows


The world seems to be getting increasingly peculiar. Whether it’s the goings on in Parliament, the record levels of economic activity in parts of the UK economy, or the madness of capital markets – there is plenty to ponder.

First of all, we have seen some unprecedented times in Parliament over the first three months of this year. The complexity and pace of change when it comes to our external negotiations with Europe pale in comparison to the developments and machinations amongst different factions within Parliament. At the time of writing, I believe Parliament has voted against over 20 motions in relation to our exit (or not) of the European Union. The lack of progress has been staggering in some respects yet thoroughly unsurprising in others.  It seems to be inevitable  – and is therefore unsurprising – that our political system is doomed to fail at bipartisanship, with the left and right of the political spectrum adamant that everything that the party opposite them says is nonsense. The surprising part of this laborious process is the splintering of party politics into a countless number of cabals, each with differing views on the way forward with exiting the EU. It seems increasingly unlikely that any sort of consensus will be found in Parliament as each faction appears to be irreversibly entrenched in its own views and unwilling to yield to opposing opinions. Whilst few things are certain in this world (apart from taxes and the wonder of compound interest), it does seem inevitable that there will be plenty more twists and turns in this political pantomime.

Away from the political stage, economies across the globe are struggling with stagnating growth with little scope to adopt looser monetary policy. Yet the UK remains a ‘bastion’ of growth with manufacturing at a 13-month high, whilst German factories languish at an 80-month low. Many will champion this figure as evidence of the resilience of our economy against adverse factors. If only this were the case! The strong performance has been due to an unprecedented level of stockpiling ahead of our exit of the European Union and is not down to any economic resilience. This ‘Brexit Bounce’, our equivalent of the ‘Trump Bump’, is a boon to short-term performance but will weigh on future economic performance as the overhang of stock is unwound. Whilst the global economic woes will catch up with the UK, this does not necessarily mean poor performance for risk assets, since we have seen a strong first quarter this year. If central banks continue to adopt a more dovish stance on interest rates to boost growth, then the cost of capital will fall, and investors will continue to seek returns above inflation and cash.

The low return that holding cash offers is not dissimilar to some parts of the stock market where low or negative returns have been prevalent for some time. Domestically biased companies have continued to underperform since the referendum and are likely to do so until there is greater political clarity. However, it is not just political uncertainty that is affecting this part of the market, but cyclical headwinds in terms of lower consumer spending and confidence, combined with structural headwinds created by technology. Certain areas of the market such as traditional retail companies with little to no online offering will continue to underperform and will continue to be snapped up by Mike Ashley in his quest for monopolistic control of the high street. We can see no respite for retail in the short term but recognise that there is deep value in portions of the domestic UK market should the right catalyst appear.

Finally, the flow of capital into different sections of the market throughout the first quarter has been noteworthy, specifically the continued allocation to low-risk and very high-risk assets. Bonds have attracted significant amounts of investors' capital over the first quarter as fears of a global recession have continued to linger. This is evidenced by the amount of global debt with a negative yield standing at over $10tn. Just to be clear, this means that you as an investor would lend a company or a government money and you would pay them for the pleasure of having lent money to them. That doesn’t strike us as a particularly attractive investment, and we have no desire to be participants in the greater fool theory.

On the other end of the risk spectrum, the initial public offering of Lyft left us scratching our heads. Lyft is a competitor of Uber and essentially is a taxi company with some snazzy technology. We think that the disruption these companies have caused in the taxi industry has been quite remarkable and consumers have benefited hugely from large cost savings. However, we think all of the benefits are being snapped up by consumers, with little left to shareholders in the business. To add some numbers to the equation: Lyft was valued at $24bn when it floated, and this compares to revenues of c.$2bn and a loss of c.$900m. A business that is valued on twelve times revenues with no clear route to profit is, again, not a particularly attractive investment for us. Nonetheless, the market was more than willing to buy the stock and clearly hopes for some gargantuan increase in revenues that would lead to some sort of profit in the future. We’ll wait and see.

As ever, BRI aims to produce attractive returns over the course of a market cycle by investing in high quality companies, unit trusts and investment trusts.