It was a bad day in the market yesterday, with the FTSE All-Share falling over 1%. This seems to have been driven by a sell off in bonds. Equity prices are usually linked to bond prices simply because as bond yields rise from a fall in bond prices, it becomes more attractive to hold bonds relative to equities. That particularly applies to shares that are “bond proxies”, i.e. ones bought because of their high yields for income seeking investors.
These changes have been driven by the realisation that the US economy is booming. The Federal Reserve has already raised US interest rates and is therefore likely to do so again if the US economy continues to race ahead. But a booming US economy is of course good news for many companies. Higher interest rates may mean that some companies pay more on their debt but that it a longer-term impact and many “new economy” companies do not have any debt.
When markets are falling in general, there is no place to hide. My over-diversified portfolio, mainly in UK small cap stocks, fell about 1%. Not every share declined but the majority did. It affected particularly highly rated, go-go stocks such as Fevertree (FEVR) which was down 8% yesterday. I am glad I now only have a nominal holding in the company. But also affected were many investment trusts which I hold as their typical low liquidity compounded by a few private investors panicking drove down the prices. Some fell more than the underlying shares they hold.
Property companies have also been affected as interest rates have an impact on their business model, despite the fact many have locked in low rates on long-term debt. Safestore (SAFE) for example was down 3.9% yesterday (I hold it).
The share price declines spread like a contagion to many other stocks who should be positively affected by a booming US economy and not impacted by higher interest rates. The rise in interest rates is hardly a surprise though it has been well signaled in advance in both the US and UK. It was unrealistic to expect the historically exceptional low interest rates to continue forever.
My reaction when there is carnage in the stock market is to stand back and wait to see whether it develops into a trend or is simply a short-term blip. There can be buying opportunities if the reaction to economic news is too severe. But interest rates are nowhere near high enough yet to cause me to abandon the stock market and move into bonds. I feel there is more destruction to come in the latter.
Unilever and Enfranchising Nominee Shareholders
Today we have some good news from Unilever. They have backed down on their proposal to merge their dual legal structure. The announcement said “We have had an extensive period of engagement with shareholders and have received widespread support for the principle behind simplification. However, we recognise that the proposal has not received support from a significant group of shareholders and therefore consider it appropriate to withdraw”.
There was opposition from both individual shareholders and institutions in the UK and there was a risk that they might fail on the Court hearing vote to gain enough support. It’s always good when shareholders make their voice heard, although it still leaves the issue that shareholders in nominee accounts were likely to be disenfranchised.
The good news in that regard is that I have received a letter today from the BEIS Department which says “BEIS is sponsoring a project by the Law Commission to examine the UK system of intermediated securities”. I will try and find out more, but don’t get too excited – it might not report before 2020!
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )