Category: markets

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Winners and losers

Mostly losers, to be honest.

Harry Hindsight says to have loaded up on healthcare (NMC), makers of surgical masks and stuff (Bunzl) and pharma (Hikma), and dumped airlines (Easyjet, ICAG), but he has never been a friend in need.

 

Name Price 28/2 Price last week Total gain/loss Pct
Easyjet PLC 1,059.21 1,464.2 -405.00 -27.7%
Melrose Industries PLC 208.8 280.4 -71.60 -25.5%
International Consolidated Airlines Group SA 473.1 623.1 -150.00 -24.1%
Legal & General Group PLC 255 313.9 -58.90 -18.8%
Standard Life Aberdeen PLC 268.9 323.0 -54.10 -16.7%
Schroders PLC 2,834.00 3,376.0 -542.00 -16.1%
Persimmon PLC 2,756.00 3,282.0 -526.00 -16.0%
BHP Group PLC 1,399.40 1,661.4 -262.00 -15.8%
Prudential PLC 1,260.44 1,489.4 -229.00 -15.4%
Halma PLC 1,909.50 2,227.5 -318.00 -14.3%
Tesco PLC 219.5 255.7 -36.20 -14.2%
3i Group Plc 1,006.50 1,171.5 -165.00 -14.1%
Ashtead Group PLC 2,358.00 2,741.0 -383.00 -14.0%
Aviva PLC 347.7 404.1 -56.40 -14.0%
Meggitt PLC 531.4 615.8 -84.40 -13.7%
Smiths Group PLC 1,507.50 1,745.5 -238.00 -13.6%
Compass Group PLC 1,689.00 1,953.0 -264.00 -13.5%
Phoenix Group Holdings PLC 682.5 788.5 -106.00 -13.4%
AVEVA Group PLC 4,234.00 4,870.0 -636.00 -13.1%
BP PLC 394.65 453.6 -58.90 -13.0%
DCC PLC 5,502.00 6,252.0 -750.00 -12.0%
Royal Dutch Shell PLC 1,662.00 1,888.0 -226.00 -12.0%
WM Morrison Supermarkets PLC 164.55 186.0 -21.40 -11.5%
Reckitt Benckiser Group PLC 5,676.00 6,414.0 -738.00 -11.5%
Ferguson PLC 6,728.00 7,566.0 -838.00 -11.1%
Intertek Group PLC 5,202.00 5,844.0 -642.00 -11.0%
Experian PLC 2,549.00 2,863.0 -314.00 -11.0%
Diageo PLC 2,738.26 3,072.3 -334.00 -10.9%
Sage Group PLC 690.8 773.8 -83.00 -10.7%
J Sainsbury PLC 188.11 210.7 -22.59 -10.7%
Spirax-Sarco Engineering PLC 8,365.00 9,365.0 -1,000.00 -10.7%
Coca Cola HBC AG 2,507.00 2,798.0 -291.00 -10.4%
RSA Insurance Group PLC 510.6 569.0 -58.40 -10.3%
London Stock Exchange Group PLC 7,568.00 8,422.0 -854.00 -10.1%
Smith & Nephew PLC 1,735.00 1,924.0 -189.00 -9.8%
BAE Systems PLC 604.4 669.0 -64.60 -9.7%
Relx PLC 1,873.50 2,072.5 -199.00 -9.6%
SSE PLC 1,530.50 1,686.5 -156.00 -9.2%
Unilever PLC 4,188.00 4,593.0 -405.00 -8.8%
Imperial Brands PLC 1,580.65 1,728.7 -148.00 -8.6%
AstraZeneca PLC 6,934.00 7,544.0 -610.00 -8.1%
National Grid PLC 988 1,063.8 -75.80 -7.1%
GlaxoSmithKline PLC 1,563.00 1,658.2 -95.20 -5.7%
Rentokil Initial PLC 482.3 508.4 -26.10 -5.1%
Rolls-Royce Holdings PLC 628.8 662.4 -33.60 -5.1%
Hikma Pharmaceuticals PLC 1,832.50 1,927.5 -95.00 -4.9%
Bunzl plc 1,895.00 1,948.5 -53.50 -2.7%
NMC Health PLC 938.4 855.2 83.20 9.7%
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Artificial bloodbath

Markets are looking ultra grim this morning. The Eumaeus portfolio down 10% on the month, and that is after a nasty previous month. High yielding bond markets are also suffering badly, with significant investor outflows.

Well it’s all artificial volatility I suppose!

Time for an admission from me, namely that my own pension is largely invested in risky assets.  Is that consistent with my view that insurance firms shouldn’t be booking risky profits in advance?

Yes perfectly. I recognise that risky investments are risky, and that the risky profits might not materialise for a long time, perhaps a very long time. I willingly bear that risk. I don’t make commitments that assume the risk isn’t there, and I have household ‘management actions’, namely not going on holiday, cutting down on the port etc, that will absorb the risk if realised.

It will be an interesting year.

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The Siren call of Illiquidity

Odysseus stuffed beeswax in his crew’s ears and had them lash him to a mast

See the great piece here by Jonathan Ford, on why pension fund investors continue to pump huge allocations at private equity, given that the returns, net of fees, are no better than the return on the stock market, and given the pricing opacity and illiquidity of private equity.

An intriguing answer, suggested to him by the hedge fund manager, Cliff Asness, is that “pricing opacity and illiquidity are not actually bugs in the private equity model, but features that investors willingly pay for”.

Continue reading “The Siren call of Illiquidity”

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We thought it was organised by Age UK

A good story here in the Telegraph about the cosy relationship between Age UK and Hub financial (owned by Just Group). Behind a paywall, but in summary, a couple took out an equity release mortgage with Just (then Just Retirement) in 2012. They were told the service was ‘the Age UK equity release service provided by Just Retirement Solutions’, and the advisor’s identification would show as ‘Age UK’. In reality, the advisor was wholly employed by JRS and had nothing to do with Age UK. The customers took out a £300k loan (which would now be worth nearly £470k).

The couple now want to change the loan to one with a cheaper rate, which will cost them £30k. Yet the advisor supposedly told them (in 2012) that gilt rates would move in their favour (i.e. go up) over the next few years, so they would face no early repayment charges.

Of course it would seem natural in 2012 to think that rates, then at a long term low of around 3%, would go up. Just as natural as thinking, in 2019, that house prices will continue to rise at 3-4% a year for ever, the assumption which is the basis of the entire equity release market.

 

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The forward paradox

Jeffery and Smith (Equity Release Mortgages: Irish & UK Experience, p.30) discuss the apparent paradox that when we use a ‘real world’ model to project a forward price, then calculate the expected value of put and call options at different strikes, the internal rate of return of those options is considerably different from that obtained using the Black formula. See their table which I have copied below. Put options even have negative discount rates.

Taking the case of the put options, how can we rationalise these negative discount rates? Why would an investor even consider an asset that is expected to lose money, let alone one as risky as a put option which has a chance of expiring worthless, losing everything?

They continue.

The answer is that few rational investors hold a portfolio 100% in a put option. Rather, a put option is a form of insurance held in connection with other assets. An investor in shares can, sometimes with a modest outlay, acquire a put option that substantially mitigates losses in a market crash. The willingness to accept a negative expected return on the put option reflects the reduction of risk to the portfolio as a whole. This is the same reason that buyers of household or motor insurance would not expect (or hope) to make a profit on that insurance.

Are they right? Does the ‘willingness to accept a negative expected return’ really reflect the need to reduce the risk?

Continue reading “The forward paradox”

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The experience of the 1930s – more from the postbag

Source: Giseck/Longstaff/Schaefer

A friend of Eumaeus comments on my post yesterday, where I said “I have argued many times in the past that we should look at the default experience of the 1930s (or the 1880s or whenever) in assessing the true default risk of long term credit exposure.” He objects that the PRA have done exactly that, citing Supervisory Statement 8/18:

When using transition data, the PRA expects firms to … compare their modelled 1 in 200 transition matrix and matrices at other extreme percentiles against key historical transition events, notably the 1930s Great Depression (and 1932 and 1933 experience in particular). This should include considering how the matrices themselves compare as well as relevant outputs…

Continue reading “The experience of the 1930s – more from the postbag”