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My annual investment mea culpa



My old boss, the legendary Nils Taube — Britain’s longest-serving fund manager — started work in the City in 1946. I worked with him in the 2000s. Around this time of year, in his sixth decade of management, he would say: “You know, Simon, I think next year I might get the hang of this thing.” He had a superb record, but he never stopped trying to improve and learn from his mistakes.

So each Christmas, like him, I look back on the year and reflect on what I could have done better.

My first priority has always been to protect investor wealth. Most of my own money is in my funds, so I share investors’ pain if things go wrong. Over the past decade, global equities have nearly trebled in value, rising at around 11 per cent a year — it is important not to give away these gains too easily by succumbing to the psychological tendency to become more adventurous after the market has risen. 

How well did we weather the storm? It is always good in reviewing portfolios to check how resilient they have proven to unexpected shocks. In March, when the market collapsed, we were 6 per cent ahead of the index. But it was then that we made our biggest mistake. 

When the market hit the bottom I was confident that it had overshot on the downside. We could see the pandemic was serious and deadly, but — as I periodically remind readers — businesses can be extraordinarily resilient. 

We bought at the bottom but should have been bolder. One of the advantages in an investment trust is the ability to gear and we should have done so. 

Thankfully, what we did acquire was right at the time. Investment instinct is to buy what has fallen furthest, on the assumption that reversion to the mean will drive a sharp bounce. This is a dangerous strategy that can leave you holding some crud whose business is actually in dire trouble and so will not snap back. 

Lockdown was always going to be devastating to sections of the economy, such as restaurants and some retail. Many companies will never recover. However, the pandemic benefited other industries. 

We should have had more Apple shares, and not holding Tesla was a drag on performance relative to the index. But our investments in companies such as Amazon and Netflix saw accelerated growth for obvious reasons. and ServiceNow benefited from businesses increasing their use of technology providers that facilitate dispersed working.

If the right thing to do in March was to buy more of what had gone down least, that changed in November with the election of Joe Biden and the vaccine advances. At that point there was finally a rotation into value. Many UK housebuilders were up 20 per cent or more in the month.

I did look at some beaten-up UK stocks in the summer, but in the end I felt that buying them would be to drift from the principles on which our funds are built. We construct portfolios around long-term secular growth themes such as “low-carbon world”, “online services” and “automation” but do leave some space for general high-quality stocks.

We considered Lloyds Bank, which has the leading share of mortgages in the UK and in normal times makes a decent return on capital there. On the assumption of a good Brexit deal the valuation left plenty of upside. However any deal leading to a deeper or longer recession or more unemployment could pose a problem. We decided not to buy any and have watched the shares rise 40 per cent since.

Overall, we are still up nearly 7 per cent on the index in the year to date (the Mid Wynd trust is up 19 per cent in sterling year-to-date after all costs, and the global equity index just under 12 per cent). More importantly, I am comfortable with how we are positioned for the year ahead — there are no stocks gnawing at my conscience at night. 

Where did we lose money? Over the year it was principally on stocks sold in March, when concerns about the length and depth of lockdown and recession were at their height.

Live Nation, which sells tickets for large rock concerts, has bounced back strongly, nearly doubling from the lows (where we sold it) — though the index has similarly recovered, rising 42 per cent from the lows in sterling terms. (A side note here: if you are being serious about this exercise, always put your gains and losses in the context of the wider market. A 20 per cent loss in a rising market is arguably worse, for instance, than a 25 per cent loss in a fast-falling one.)

Other holdings where we took losses on disposal in March, such as Land Securities, have come back very little as investors remain sceptical of recovery prospects. Our decision there proved correct. 

Of course, we also got things right for the wrong reasons. We have a range of investments in scientific equipment makers such as Thermo Fisher. We did not expect this pandemic, but we invest in this area as public health generally moves towards more testing and monitoring of patients. When governments needed mass testing for the virus, these companies benefited.

The big lesson we take from 2020 is not to underestimate the rate of change caused by new technologies or the speed at which new products can now be brought to market. Witnessing healthcare companies go from identifying a new virus to delivering a vaccine for it within a year is frankly astonishing. 

If you have been too hesitant this year, not wanting to bank on a vaccine so soon, you had good historical grounds for caution. The mRNA technology on which these new vaccines are based has never before been used to develop vaccines, but the clinical trial data is consistently impressive. One person’s caution is another’s prudence.

Which brings me to one final piece of advice if you are reviewing your own performance this year: do not be too hard on yourself. Nils Taube would deliberately do this exercise only once every 12 months. Do it more often and you can find yourself driving by your rear-view mirror. As he always cautioned: “Don’t kick yourself too much — you might bruise.” 

Simon Edelsten is co-manager of the Mid Wynd International investment trust and the Artemis Global Select fund. 

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A blueprint for central bank digital currencies




Britain’s choice of world war two codebreaker Alan Turing to feature on its new plastic £50 note is ironically apt, and for several reasons. His work on cryptography speaks to the new front in monetary debates — how best to protect personal data in an age of digital payments. At the same time, the discrimination the war hero faced for his sexuality shows why privacy is important, including from the government.

In an interview with the Financial Times this week, European Central Bank executive Fabio Panetta said that a digital euro would protect consumer privacy — the public’s greatest concern over a central bank digital currency, according to a consultation by the ECB. Referring to Facebook’s attempt to launch the Libra stablecoin, Panetta warned that if central banks did not provide an alternative they would cede the ground to Big Tech. Companies could then use their dominant market position to set privacy standards.

Central bank digital currencies, however, raise questions about how to protect data from the state. If CBDCs became the dominant money then central banks could have vast data repositories of nearly every transaction in an economy. The need to clamp down on illegal money laundering would mean central banks, just like commercial banks today, would not allow individuals to hold their money anonymously — linking these transactions, however compromising, to individuals.

That might be acceptable in authoritarian regimes like China, where a digital currency project is moving ahead at pace. In democracies it is not. For this reason the Bank for International Settlements is right to call for the preservation of a two-tier financial system in its annual economic report. The so-called central bankers’ central bank advocates an account-based design with regulated private banks dealing with the public and the central bank maintaining digital currencies to make the payment system more efficient. It calls for digital identities tied to these accounts — fighting identity fraud as well as money laundering.

This arms-length structure would preserve privacy — since the state could access records only once a criminal investigation begins — and allow the private and public sector to do what they do best. The BIS argues the central bank coins could work as the plumbing of the system while banks and others could innovate and have responsibility for keeping data secure. Alternative token-based designs for a digital currency could preserve anonymity but facilitate crime.

One such token in the private sector, bitcoin, is the favoured means of payment for hackers’ ransom demands, as well as for some of those avoiding tax; this week the South Korean government seized millions of dollars’ worth of cryptocurrency from 12,000 people accused of tax evasion. Monero, a cryptocurrency that promises even more privacy than the pseudonymous bitcoin, has started to become the choice of many criminals. Cash has the same problem: at one point investigators concluded 90 per cent of £50 notes were in the hands of organised crime.

A two-tier financial system means banks could, as they do at present, have responsibility for checking identities and keeping up with “know your client” rules. While state-run identity schemes such as India’s Aadhar can be used to make sure digital currencies are going to the right place, there are valid ideological questions about government-run ID schemes. The BIS blueprint is a good start for central banks considering digital currencies, but more radical steps such as handing more personal data to the central banks need more widespread consultation and support.

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Pakistan’s Gwadar loses lustre as Saudis shift $10bn deal to Karachi




Saudi Arabia has decided to shift a proposed $10bn oil refinery to Karachi from Gwadar, the centre stage of the Belt and Road Initiative in Pakistan, further supporting the impression that the port city is losing its importance as a mega-investment hub.

On June 2, Tabish Gauhar, the special assistant to Pakistan’s prime minister on power and petroleum, said that Saudi Arabia would not build the refinery at Gwadar but would construct it along with a petrochemical complex somewhere near Karachi. He added that in the next five years another refinery with a capacity of more than 200,000 barrels a day could be built in Pakistan.

Saudi Arabia signed a memorandum of understanding to invest $10bn in an oil refinery and petrochemical complex at Gwadar in February 2019, during a visit by Crown Prince Mohammad Bin Salman to Pakistan. At the time, Islamabad was struggling with declining foreign exchange reserves.

The decision to shift the project to Karachi highlights the infrastructural deficiencies in Gwadar.

A Pakistani official in the petroleum sector told Nikkei Asia on condition of anonymity that a mega oil refinery in Gwadar was never feasible. “Gwadar can only be a feasible location of an oil refinery if a 600km oil pipeline is built connecting it with Karachi, the centre of oil supply of the country,” the official said. There is currently an oil pipeline from Karachi to the north of Pakistan, but not to the east.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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“Without a pipeline, the transport of refined oil from Gwadar [via road in oil tankers] to consumption centres in the country will be very expensive,” the official said. He added that at the current pace of development he did not see Gwadar’s infrastructure issues being resolved in the next 15 years.

The official also hinted that Pakistan’s negotiations with Russia for investment in the energy sector might have been a factor in the Saudi decision. In February 2019, a Russian delegation, headed by Gazprom deputy chair Vitaly A Markelov, agreed to invest $14bn in different energy projects including pipelines. So far these pledges have not materialised, but Moscow’s undertaking provided Pakistan with an alternative to the Saudis, which probably irritated Riyadh.

Arif Rafiq, president of Vizier Consulting, a New York-based political risk firm, told Nikkei that a Saudi-commissioned feasibility study on a refinery and petrochemicals complex in Gwadar advised against it. “Saudi interest has shifted closer to Karachi, which makes sense, given its proximity to areas of high demand and existing logistics networks,” he added.

Rafiq, who is also a non-resident scholar at the Middle East Institute in Washington, considers this decision by the Saudis as a setback for Gwadar, the crown jewel of the China-Pakistan Economic Corridor, the $50bn Pakistan component of the Belt and Road.

The Saudi decision “is a setback for Pakistan’s plans for Gwadar to emerge as an energy and industrial hub. Pakistan has struggled to find a viable economic growth strategy for Gwadar,” he said. Any progress in Gwadar in the coming decade or two will be slow and incremental, he added.

Local politicians consider the shifting of the oil refinery a huge loss for economic development in Gwadar. Aslam Bhootani, the National Assembly of Pakistan member representing Gwadar, said the move is a loss not only for Gwadar but for all of the southwestern province of Balochistan. He said he would urge the Petroleum Ministry of Pakistan to ask the Saudis to reconsider their decision.

The decision has shattered the image of Gwadar as an up-and-coming major commercial hub. In February 2020, the Gwadar Smart Port City Masterplan was unveiled, forecasting that the city’s economy would surpass $30bn by 2050 and add 1.2m jobs. Local officials started calling Gwadar the future “Singapore of Pakistan”.

Rafiq said such dreams are unrealistic. “A more prudent strategy [for Pakistan] would be to use the city as a vehicle for sustained, equitable economic growth for Balochistan, especially its Makran coastal region,” he said.

Relocating the refinery from Gwadar to already developed Karachi also implies that CPEC, or BRI, has failed to promote Gwadar as a mega-investment hub. “Foreign direct investment in Gwadar will be limited and will remain exclusively Chinese,” an Islamabad-based development analyst said, “limiting the city’s scope for development”.

The refinery decision has once again exposed the infrastructural shortcomings of Gwadar, which Pakistan and China have failed to address in the past six years. Without highways and railways connecting it with northern Pakistan, the city will never develop as its proponents hope.

A version of this article was first published by Nikkei Asia on June 13, 2021. ©2021 Nikkei Inc. All rights reserved.

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Oil hits highest price since April 2019 before moderating




The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.

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