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The Financial Ironmonger Blog No 40/2017

The Financial Ironmonger Blog No 40/2017

Every week our guest blogger, David Oakes of Mosaic Money Management (aka The Financial Ironmonger), shares with us his take on some of the major UK and overseas macro and political events that shaped the previous week.

Please be reminded the value of investments, and the income from them, may fall or rise. The views expressed in this article are those of the author at the date of publication and not necessarily those of Chelverton Asset Management Limited or Mosaic Money Management. The contents of this article are not intended as investment or tax advice and will not be updated after publication unless otherwise stated.


I arrived in Edinburgh this week just as the government there decided to ban fracking, after a public consultation of just 60,000 out of a population of more than 4mn. Much as we were consulted about the closure of our local bank branch, (not), it duly produced the required result. It is a massive lost opportunity given that 78% of domestic heating is gas fired, and 43% of industry, much of the later imported.

It is, of course, rank hypocrisy to bring shale gas from another country whilst pretending that the ban helps fight climate change, and will eventually render Scotland carbon neutral. It also throws away a chance to further the world leading expertise developed in the North Sea oil and gas fields, which would create jobs, wealth and tax revenue. But the SNP would rather that the population wallow in pity, inevitably caused by the wicked people in Westminster, than do anything constructive.

Interestingly, the 13 Scottish Conservative MPs, (up from 1 before the election), are starting to flex their strength, asking for a cut in whisky duty, and investment in cross-border rail, and road, infrastructure. It is canny stuff, as they say up there. The 13 are vital in the parliamentary arithmetic, with the DUP of Northern Ireland securing £1.5bn for lending their 10 members to a limited coalition agreement. And the targeting is clever, delivering what the SNP government cannot, and for the benefit of the whole country. I have not seen this reported south of the border, but it will only add pressure to a very difficult, forthcoming, budget settlement.

The Conservative party conference was far, far, worse than I expected, and I watched a replay of the PMs’ speech through the slots between my fingers, firmly held over my eyes. One for the history books, sadly. My totally unscientific survey suggests that the older you are, the higher the sympathy for her, and if you have to perform in public, even professional broadcasters can have really bad days, and she is not one of those. The average Conservative party member is 72, membership has fallen below 100/-, so the party is literally dying on its feet. Labour has 570/-, the largest number in Europe, and still growing.

The obvious answer is to change the leader, just as Labour did, when they judged that to be the easy solution, which it clearly was not. The Conservatives have now been in charge since 2010, (arguably better when constrained by coalition), and they look tired compared to an opposition happy to promote any populist policies that appeal, without responsibility. And whilst it is the lot of the Conservatives to clean up after every previous Labour government, the economic backdrop, this time, has been particularly brutal.

Government involves grey men, (largely), implementing grey ideas, in a managerial way, especially in difficult times. It is the only way, but of no interest to those seeking instant gratification, particularly the young, who have no economic interest in the present setup. How this changes is something that anyone has yet to find an answer to, but it is the most pressing question of our time. Certainly, none of the “pretenders” have come up with anything, bar trying to imitate Labour policies, and thus Mrs. May is trapped by a totally misplaced sense of duty. She should leave her colleagues to sort it between themselves whilst she still has her health. Nobody thinks worse of Michael Howard for his tenure.

The point of going to Scotland was to attend an investment conference; the Edinburgh fund managers always claim to be above the City noise, and not distracted by the short term. We avoid talking about specific stocks in this blog, but I thought this one example might be interesting, which is Tesla, the up, and maybe, coming American electric vehicle manufacturer. One fund manager had 8% of his portfolio in this, whilst another would happily have shorted it, bar the influence of the passive funds.

Shorting involves selling shares that you do not own in the expectation that you can buy them back at a lower price, later. But, these shares are part of an index, and there is an increasing demand from investors to buy tracking funds, which they perceive to be low cost, (which they are), and low risk, (which they are not). Every month, your pension contribution goes in to the same shares, and the higher the price, the greater the allocation must give it.

This leads to a lack of what managers refer to as “price discovery”. Simply, if a share is priced at £1, or $1, limited in number, and part of an index, if people keep buying, as the system does, the price must go up. Only when investors start selling does the price become apparent, and they will all be trying to exit at the same time.

According to the chap who does not own it, Tesla is valued on 103 times earnings for 2020, which assumes that they can then deliver 500/- units a year, up from 77/- now. Furthermore, it has no proprietary technology, (the stuff is all bought in), and the warranty claims are increasing, demonstrating that they are not very good at building cars.

Contrast this with BMW, building 2.2mn units now, valued at 7.5 times earnings, and not that far behind in developing an electric version. The bullish case is that Tesla is transformational, the realistic case is that throughout history, nearly all car manufacturers have gone bust, much as the total amount invested in airlines, since planes were invented, has been negative. Maybe the future is autonomous, driverless, which is not going to happen soon, and certainly not in a $100/- Tesla.

Such confusion might be behind the 9.3% drop in new car sales in September, in the UK. Sales of diesel variants fell 21.7%, albeit that hybrids were up by 41%, but that is only 6,000 units, less than 2% of the total. Change is not going to come that quickly, especially when there is so much capital invested in existing assets, and infrastructure. After all, if you own a car, or a filling station, both now deemed worthless, you would just run both in to the ground.

And in this febrile political atmosphere, it would be a very brave politician who deemed your car of nil value; for many young people, without a hope of housing capital, it is not their main asset so much as their only.


David joined Manchester stockbroker Henry Cooke, Lumsden in 1977 and after becoming a member of the London Stock Exchange in 1984 held a number of senior positions within the firm including Managing Director of the in-house fund management company and member of the Executive Committee.

After senior appointments at Cazenove Fund Management and latterly Mercater Capital Management, David joined Mosaic Money Management in 2013. He has successfully managed private client and fund portfolios for over thirty years and has particular expertise in providing a multi manager service to his loyal client base.

The Financial Ironmonger is a hat-tip to Ironmonger Lane, the location of Chelverton’s London office.