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Investing in the UK is far from a lost cause

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Back in 2015 the FTSE 100 hit 7,000. It was quite exciting. Today the FTSE 100 is 5,876. Not so exciting.

Shares in some of our flagship companies look awful. Rolls-Royce hit a 17-year low this week. Royal Dutch Shell is down 60 per cent this year alone. Things haven’t been quite so awful across the board — the FTSE 250 is roughly unchanged overall since 2015. But it is still down 21 per cent this year.

All of this has hit our global position. The UK market as a share of both the European and global equity markets is the lowest since the 1970s. The whole thing in a nasty nutshell: a few weeks ago Apple became worth more than the FTSE 100 index.

You will say that this all makes sense. The UK market is dominated by the kind of companies no one wants any more — banks, miners and old-fashioned energy. No priced-to-infinity tech stocks here. We’ve also had a horrible time with Covid-19. And our economy is a mess, and one that is about to get a million times worse with Brexit.

This misery argument is very easy to make. One number that makes the case is the percentage of commercial rents collected by the time the third quarter ended this week. UK retailers have paid just over 12 per cent of the rent due for the quarter (that’s even less than at the end of the June quarter). The office sector was better — 32 per cent of the rent was collected, compared with 22.7 per cent at the end of the second quarter. Better, but still carnage.

The unemployment this kind of number hints at might have been delayed by the endless and confusing set of compensation schemes being put in place to counter the endless and confusing lockdown policies. But it will still come: the Bank of England is looking at 7.5 per cent unemployment by the end of the year.

These numbers are so easy to find that it is perhaps too easy, as Andy Haldane puts it, to “catastrophise” the discussion — “to dismiss good news and dwell on bad.” Mr Haldane, chief economist at the Bank of England, is expecting 20 per cent GDP growth in the third quarter. The economy, he says, has already recovered “far faster than anyone expected”.

The number of people in work in the UK has so far fallen by only 0.7 per cent since the pandemic started. Retail sales are back to pre-pandemic levels. UK factory activity grew for the fourth month in a row in September, based on the IHS Markit/Cips Manufacturing Purchasing Managers’ Index.

And Brexit? Perhaps we worry too much. As Capital Economics noted, at this point there isn’t that much of a difference between a deal and no deal. That’s partly because leaving the customs union and the single market makes the Brexit we have chosen a relatively hard one anyway. But it is “mostly because a lot of arrangements have already been put in place”.

Trade deals have been replicated. There has been much progress on financial services equivalence and exporters have had plenty of preparation time. In the great scheme of things it might turn out to be much less of a big deal than it seems right now.

If you are prepared to open your mind to the idea that the UK is not a lost cause (it isn’t) and that the headwinds we face are fairly temporary (they are), the UK stock market suddenly looks very interesting. As Alan Brierley of Investec points out, our equities are “approaching pariah status”. They are now trading on the greatest discount to global equities for 50 years — with UK value stocks trading at their greatest discount to their growth counterparts ever.

Yes, ever — despite the fact that the past 25 years of long-term data always shows value investing outperforming growth. Fund managers are generally known more for their bandwagon jumping than their contrarian thinking skills. But with things at this kind of extreme even they are beginning to think there might be opportunity here.

What if Brexit passes without the world ending? And dividends payouts return? Even if UK banks don’t start paying dividends again, AJ Bell reckons the UK yield will be 3.7 per cent next year. What if the world recognises that it needs our miners? You can’t have electric cars without copper. Or we dump lockdown as our anti-Covid strategy? Or the pandemic forces a sudden rise in productivity upon us? Any of these things could prompt a bit of a rethink.

On then to Temple Bar, a value-oriented UK investment trust (that I hold) and that has acted as a poster boy for the appalling performance of our stock market recently. It’s down 50 per cent in the past year. It lost its long-term manager in the spring and has just announced the new ones: Nick Purves and Ian Lance of RWC Asset Management.

The good news is that the board appears to have been unmoved by the appalling performance of the past strategy in making a decision on their new one. Mr Purves and Mr Lance are firm value adherents — now more than ever. There have been, they say, only three occasions in their careers “when dislocation in the stock market has created the most exceptional opportunities for value investors: post the technology bubble of the late 1990s; coming out of the global financial crisis; and today”. Brave words.

You can buy shares in Temple Bar on a discount of 14 per cent to their net asset value and a prospective dividend of 6 per cent (the discount reflects the bravery). Otherwise there are a few new names raising money at the moment (this really is contrarian). The new Tellworth British Recovery and Growth Trust (which you can buy into on PrimaryBid) aims to do exactly what it says on the tin.

The Schroder British Opportunities Trust plans to invest in both undervalued private and listed companies (there is a touch of bandwagon jumping in the private bit, of course). Finally there is the Buffettology Smaller Companies Investment Trust, which is looking to raise £100m with a view to value investing among the smallest of UK-listed firms.

All look interesting — although as ever with investment trusts I’d be inclined to wait until they list and hope to buy at a discount rather than pointlessly pay full price for shiny new shares.

Professional investors will insist on being able to put a time on a trigger for change, since vague lists like the one I have made above don’t count for them. Ordinary investors don’t need to bother with that.

No one cares about our quarterly performance, thankfully. We just need to know that cheap UK equities will break out at some point. And that when it happens, in the words of Angus Tulloch, adviser to Kennox Strategic Value Fund (which I also hold), it will “happen very quickly”. Best be ready.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. Views are personal. merryn@ft.com Twitter: @MerrynSW





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How traders might exploit quantum computing

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If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

izabella.kaminska@ft.com



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Martin Gilbert returns to dealmaking fray with Saracen acquisition

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Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”



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Wall Street stocks bounce back after inflation scare

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Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.



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