On Target Newsletter

In this issue:

  • Global negatives
  • Technology and the elderly
  • Bursting zombies
  • Value outperforms growth
  • China
  • Woke investing
  • Portfolio metrics

Act Now to Survive Times of Massive Change

Earlier this year I cashed in most of my shares – something I haven’t done since I was a young investor. Why? Because I reluctantly concluded that too many things were going wrong with the world economy… In combination they argue for painful recession, perhaps even depression.

Look at the list of negatives…

► Inflation, something we haven’t suffered for decades, has become a serious problem. Central banks first denied it would be anything more than a “transitory” phenomenon; even now they under-estimate the probability of persistence and the need to act firmly to crush it

► Governments are in the hands of a depressing cadre of incompetent leaders – the United States seemingly run by a mentally fading charmer who is captive of his teleprompter; Britain by a premier comfortable with lies, violating his tax promises and a weird climate mania; China by an autocrat obsessed by fear of the superflu; Russia by one prepared to inflict devastating damage on a neighbour and his own armed forces for trifling strategic benefits; Europe by leaders unable or unwilling to advance national interests manipulated by the superpowers.

► Energy prices – natural gas, oil, even coal – are at record levels. This is because the political obsession with renewables has focused investment on unstable, unreliable and expensive technologies while starving the world of needed expansions in supplies of fossil fuels. Policies are geared to promoting this madness. The war with Russia intensifies the problem. Europe, in particular, is committed to spending enormous amounts on wind, solar and nuclear and switching from Russia’s cheap supplies of gas to costly substitutes from elsewhere.

► A global shortage of food that began with droughts and other weather-related setbacks to agriculture in South America and the US has exploded this year into a major crisis by the Ukraine war, related disruptions such as shutdowns to fertilizer production, and aggressive stockpiling in China (which now holds 70 per cent of the world’s corn reserves, 50 per cent of its wheat). It says floods mean its winter wheat crop could be the worst ever.

Export bans now encompass 15 per cent of food that is traded internationally.

Governments obsessed with climate change have enforced conversion of food crops into fuel for vehicles – 10 per cent of all grains, 18 per cent of vegetable oils.

► China, the main driver of the world’s economic growth, is experiencing a plunge in response to aggressive policy measures by the government – the anti-speculation squeeze afflicting residential property, and the fierce zero-Covid measures that have shut down dozens of cities and quarantined hundreds of millions of their citizens.

The relentless lockdown measures are disrupting global supply chains and stoking inflation risks. Nomura estimates that if every Chinese city were to adopt the testing requirement now imposed on the inhabitants of Beijing, 814 million people would need to be swabbed regularly at a cost of 1.7 per cent of gross domestic product.

► For three decades the world economy has been growing through integration. Jobs flooded from advanced nations to fast-developing ones. Multinationals have concentrated their production processes in the most efficient, cheapest locations. Information technology has transformed manufacturing and services. But the pandemic brought globalization to a screeching halt. It made companies suddenly aware of the risks of depending for components and processing on handfuls of suppliers located far away. Deglobalization has begun. It has a long way to go.

Economies are shrinking under the impact of soaring energy and food prices, worsening supply bottlenecks, sapping business and consumer confidence. A worldwide process of readjustments, of abandoning long-established certainties, of facing up to the brutal scale of changes, is speeding down the track.

Times are going to become unimaginably tough. Plan your moneycraft and investing accordingly.

Modern Technology Treats Elderly with Disdain

Those who design the technology we use… have to use… in our daily lives treat the elderly and the frail with total disdain, Jemima Lewis writes in The Telegraph.

The elderly seem to endure with extraordinary resignation the anxieties, frustrations and humiliations that come with being old in a world so at odds with their needs.

She gave the example of a man trying to park outside a church who was ordered to pay a charge on an app. Not having any, he sought to pay some other way. But there was no information how to do that. Nor could he find any human being at the parking firm to discuss the matter. So he ended up being hit with a fine.

Digital technology has transformed our social infrastructure, making many transactions faster and smoother for those who can handle a smartphone with ease. But the logistical landscape we now live in – one where humans and tactile objects have been replaced by touchscreens, apps and bots – is peculiarly hostile to anyone living with the ordinary side-effects of old age.

Lewis gives as an example her mother, who is going blind… as is commonplace with those aged 65 or more.

Almost everything she needs is locked inside either her smartphone or her computer – bills, medical records, emails, train tickets, on-line shopping. But she can’t see her computer screen without tilting the monitor until it is two inches from her nose. Even then, she can’t find the tiny cursor for her mouse. Or see the pale grey boxes into which she is supposed to type her passwords.

She veers between fury and self-reproach, cursing her own incompetence. But it’s hardly her fault that the vast majority of Internet sites have been designed without the elderly or disabled in mind.

An American study of the top one million websites worldwide found that 98 per cent of web pages did not meet international standards of accessibility. There were an average of 61 such defects per page, the most common being low contrast, missing text and missing links.

Lewis reports that some new tech can be very helpful for the visually impaired, but the digitization of ordinary domestic gadgets such as washing machines and cookers has only created a new layer of difficulty. Instead of buttons, knobs and dials, which can be found through touch and which click informatively under the fingers, users must now navigate the smooth surface of yet another touchscreen.

Do the people who design these things not have parents or grandparents?

An Avalanche of Bursting Zombies

“The sound of bubbles popping can be heard all over the place,” says The Economist. “Tech shares, initial public offerings (IPOs), blank-cheque companies (known as SPACs), start-up valuations and even cryptocurrencies: all the assets that climbed to dizzying heights over the past few years are now coming down to earth.”

In recent years many factors combined to boost tech companies. The coronavirus pandemic pushed life and work on-line. Government stimulus programmes expanded demand. Super-loose monetary policies made tech’s long-term growth prospects more attractive to investors.

Now the environment has turned unfriendly. People are turning away from screens and leaving home again. Economies are experiencing an unexpected negative – inflation. It’s making politicians and central banks panic, so interest rates are rising, as are fears of something that investors haven’t seen for a long time – stagflation. Climate change mania has cramped investment in supplies of fossil fuels. Together with war in Europe, major shortages have emerged. All these unexpected negatives are destroying the positive environment for sectors that count on economic growth for rising values.

Although America’s tech titans – Alphabet, Amazon, Apple, Meta and Microsoft – have lost a quarter of their value since November – they remain relatively safe bets as their core businesses are still growing. Persistently unprofitable gig-economy firms such as Uber look shakier.

“It would be wrong to compare the current tech slump to the bursting of the dot-com bubble two decades ago,” says The Economist. “Back then, companies had neither healthy balance sheets, nor promising business models. Nowadays many of them have both.

“The stomach-turning market gyrations are unpleasant to a generation of tech founders, workers and investors who have lived a long bull run. But they are unlikely to see digital technology eating the world.”

For a less optimistic point of view look to the well-known American commentator Doug Casey, who points out that many companies that “have been trading at insane earnings multiples for a long time” began losing value a year ago, but have now lost 50, 75, even 90 per cent.

Among stocks getting hurt particularly badly are “zombie” companies – those that took advantage of low interest rates and overleveraged. They borrowed a lot to pay dividends and buy back shares. Their borrowing had little to do with growing their actual business.

“As the economy gets much weaker over the next few years we’re going to see lots of corporate bankruptcies,” Casey predicts, “with massive layoffs of workers. That’s one thing happening due to ultra-low interest rates and the money printing.”

People have become convinced that the government will always step in to throw more money at the situation. But “those days are over – we’re now in a massive bear market.”

The Fed won’t be able to raise interest rates to the extent needed to promote saving and finance capital formation. “What they’re going to do is just keep printing money and hope that magic happens.”

The long bull market in stocks, bonds and real estate has come to an end, Casey says. America has become financially over-leveraged, economically unproductive (mainly producing “digits and consumables” rather than capital goods that create wealth), and is politically unstable, as well as socially explosive.

The only investments he recommends are precious metals, their mining stocks and oil producers, “which are still very underpriced relative to everything else.”

Value Outperforms Growth… At Last

Value stocks are providing investors with some shelter from the storm sweeping markets as portfolio managers seek out bargains and dump high-flying companies that have been in vogue since the wake of the financial crisis. The cumulative return from global value stocks has overtaken that from growth shares for the first time for years. A strategy of buying shares of companies that are cheap in terms of their profits and book values has generated returns of about 30 per cent so far this year.

Growth investing dominated until this year as central banks unleashed successive rounds of stimulus to shield the world economy against the financial crisis and the pandemic. The measures, including setting interest rates at very low levels, helped inflate the prices of companies not expected to reach peak profits for years to come. Value investors, in contrast, struggled to compete as markets neglected companies that seemed to promise growth even if expensive.

“We survived the worst decade for value in history [but] now we’re enjoying the fruits of the rebound” says Rob Arnott of the consultancy Research Associates. Nick Kirrage of Schroders says the situation of growth stocks had become so overstretched that an eventual reversal was inevitable.

But analysis by research consultancy AQR shows that the value spread – dispersion between the valuation of growth and value stocks – is still nearly as stretched compared with historic norms as it was at the peak of the dotcom bubble in 2000. The “ridiculous spreads” that we are still seeing “mean that value is going to make a lot of money in the next three-plus years.”

Vanguard expects US value stocks to deliver annualized returns averaging 4.1 per cent over the next ten years compared to just 0.1 per cent for US growth stocks.

The vast majority of American investors, however, having become conditioned to “buying the dip” in recent years, are still equivocating about whether to switch to purchasing value instead of growth. Previous rallies for value stocks since the financial crisis turned out to be brief and be signals to double down on growth stocks. However what makes the current situation different is high inflation and the prospect of rising interest rates – bad news for growth companies.

China: the Inside Story

Increasing difficulties mean China’s economy will probably only grow 2 to 3 per cent this year – way below the 5½ per cent target set by the government – says the British China expert Simon Hunt.

“The lockdowns have brought growth to an abrupt halt,” he says in Frontline China Report. “There are two reasons why the leadership has chosen a Covid zero path. First, the elderly… those over 65 years… number some 160 million. Should the virus hit many of them they would overwhelm the health facilities, given that the Chinese vaccinations have only 25 per cent of the strength of those in the West.

“Second, Chinese goods are embodied in nearly all global supply chains. Without these goods and components, global industries slowly grind to a halt as they are unable to find alternative supplies at short notice. Xi Jinping has said ‘China is tightening international production chains’ – lockdowns are a way of showing to Washington, Brussels etc how much their countries depend on China.”

Hunt says that although Xi will probably be re-elected president for a third term later this year, his authority may be cut. The lockdowns have a political context – the rumoured leadership struggle between Xi and members of the China Youth League. X’s policies are to switch the focus of economic growth from the coastal cities to the central and western provinces where most households have incomes below the national average. The League want growth to remain based on coastal cities (“the Shanghai clique”).

The dispute between the rival cliques is also over property. The president wants to pursue policies that make housing affordable to all and to reduce private-sector development. His policy will break the incestuous ties between developers and local governments – “both sides have been in each other’s pockets.”

Lockdowns give the president the means to tighten control over large sections of the population; they weaken those sections which have gained huge wealth over the last 40 years, undermining the power of the Communist party.

Despite Xi’s “rather clumsy old-style Maoist behaviour” he will probably be re-elected since he has the support of the party, the armed forces and nearly all of the country’s 540 million rural population, plus the 190 million who have moved to the cities since 2005.

Hunt says there is talk that Xi may have just had a minor stroke and that dissension has started to fracture the nation’s leadership. A series of lockdowns may extend into next year for political reasons as well as outbreaks of Covid variants that could surface during the usual flu season.

The economy is now “in deep trouble” with a plunge in construction activity and car sales, household and business confidence. Lockdowns, together with a renewed thrust towards state ownership, are resulting in a heavy exodus of business people and bankers from the mainland and Hong Kong to Singapore, Dubai and other parts of the world. Foreign-trained Chinese are part of the exodus, which Hunt describes as a brain drain of large proportions.

External problems are magnifying. Relations with America and Europe are getting worse. A critical problem for Xi is the now-obvious US containment policy and defence of Taiwan, with the risk of a military clash by, say, 2024. China will have to navigate a difficult international environment and probably a global asset crash and depression within the next two to three years.

Fortunately China, whose economy is already larger than America’s in purchasing power terms, and likely to continue growing twice as fast, has formidable resources to withstand such crises.

The Economist says implementation of Xi’s policies has been “punitive and erratic,” with a blizzard of fines, new regulations and purges. They have caused the dynamic tech industry, which contributes 8 per cent of GDP, to stagnate. A savage but incomplete crackdown on the property industry, responsible for over a fifth of GDP, has led to a funding crunch. Housing sales in April were 47 per cent below those of 2021.

The government hopes its vast stimulus programme that is in the works will kick-start the economy. China’s industrial policy has delivered some formidable successes – for example building a dominant global position in advanced batteries. On the other hand it has had some dismal failures, as in microchips.

Investing in Woke Portfolios

Investing in businesses committed to ESG – environmental, social and corporate governance principles – has made investors feel good. But it’s no longer a success. Since the beginning of the year it’s been a way to lose money rather than make it. May saw $2 billion of outflows from American ESG funds – the biggest ever monthly cash negative. Vanguard’s Social Index fund is down more than 22 per cent for the year. Other big ESG funds, which concentrate on businesses favouring things like diversity and human rights, have also fallen sharply.

Some major figures in the investment management community have started to challenge using political fads as a basis for portfolio selection. The head of responsible investing at HSBC, Stuart Kirk, said publicly that climate risk “is not a risk we need to worry about.” Establishment figures aren’t allowed to admit such truths. The bank promptly suspended Kirk.

Bloomberg’s commentator John Authers says that ESG only seemed to be such a good idea because it delivered great rewards. “At first, with big money flows being directed into places that hadn’t received so much capital before, ESG was almost a self-fulfilling prophecy.” A big element of its success was oldfashioned return chasing. “Another was the quiet life faction… Present ESG as a passive investment that makes the same returns as a normal benchmark index and many trustees [of institutional funds] will switch to it just to head off angst from their clients, particularly in universities or the public sector.”

Using Metrics in Portfolio Selection

Writing about Ben Graham’s book The Intelligent Investor, Jason Zweig says it “will teach you three powerful lessons: how you can minimize the odds of suffering irreversible losses; how you can maximize the chances of achieving sustainable gains; how you can control the self-defeating behaviour that keeps most investors from achieving their full potential.”

Tim Price of Price Value Partners says that in his own business they pursue Graham’s vision of investing by trying to focus solely on the shares of companies run by principled, shareholder-friendly management with a policy of capital allocation when and only when they can buy such securities at a meaningful discount to their inherent worth.

There are some objective measures of value that can be assessed mathematically, including the following metrics:

► At least a 10 per cent cashflow from operations yield from a company’s operations, divided by the combined value of its equity and debt;

► A price/earnings ratio of, ideally, less than 16 times;

► A price/book ratio of less than 1.5 times and ideally less than one times;

► A debt/total assets ratio of, ideally, less than 30 per cent;

► Cash from operations growth (“we have no interest in declining or stagnating businesses)”;

► A return on equity of at least 8 per cent on average per annum.

Tim says that fulfilling these criteria is no guarantee of securing a successful investment, but they’re unlikely to damage your prospects, especially if you can identify genuinely able managements.

Six Ideas to Beat Rampant Inflation

Where should savers invest their money to beat rampant inflation – now at 9 per cent in Britain? Lauren Almeida gives six recommendations in The Telegraph:

► Commodities. The BlackRock World Mining Investment Trust, in companies such as Rio Tinto (copper) and Glencore (coal), is up 16 per cent already this year and offers a dividend yield of 6.6 per cent.

► Property investment trusts. Linkage of their rental income to inflation makes them attractive. Two that are suggested are Supermarket Income Reit and LXI Reit.

► Infrastructure funds. These give a stake in real assets such as bridges and roads. 3i Infrastructure has a broad range of such assets in Europe and Asia. It’s up 16 per cent this year.

► Index-linked bonds. Capital Gearing Trust offers exposure to a range of assets —  bonds, infrastructure, property and private equity.

► Gold. It’s traditionally viewed as a safe haven during periods of high inflation or market volatility.

► Bitcoin. Its advocates argue that this, the world’s largest cryptocurrency, can act as “digital gold” and as a hedge against inflation.

Vietnam Bounces Back from Covid

The number of deaths and severe cases from Covid-19 has almost disappeared since Vietnam abandoned its Chinese model of zero tolerance for the virus. A measure of how strongly the economy has recovered from the pandemic is that retail sales of goods and services have now surpassed the pre-pandemic record.

Last month S&P upgraded the nation’s long-term sovereign credit rating to BB+ — only one notch away from “investment grade” and not far behind the BBB+ rating of its Southeast Asian rival Thailand.

Fund manager Kenneth Ng says a recent stockmarket correction is a clear opportunity to buy into quality names. His NTAsset, a regional small-cap specialist, particularly favours Vietnam. Its key holdings are…

► FPT Corporation, a major software business.

► Mobile World Investment Corporation, a retail chain leading in infotech, electronic appliances and pharmaceuticals.

► Military Bank, a leading player in digital/mobile banking.

► Phu Nhuan Jewelry, which commands 55 per cent of the branded jewellery market.

► Nam Long Corporation, a leading property developer.

Britain’s Untouched Underground Treasure-House

It’s madness for the UK to depend on imports of expensive energy when it has enough natural gas beneath its ground to last for centuries, says the well-known science commentator Matt Ridley.

Under pressure from environmentalists and Russian lobbyists (Russia hates shale gas, which would compete with the gas it sells to Europe), the government effectively banned shale gas extraction in the UK in 2019 by imposing what he calls “absurd rules” about not letting mining cause subterranean vibrations more than one-fifth as strong as those allowed for other industries.

Instead, tens of billions of pounds have been invested in the wind industry, despite the fact that in 2020 it provided just 4 per cent of Britain’s energy compared with 42 per cent from gas. Wind actually helped gas increase its share of electricity generation by offering a reliable and highly flexible alternative to generate power when the wind drops.


The yen’s collapse: The Japanese currency has fallen sharply in dollar terms this year. It’s blamed on the widening gap between inflation and interest rates in the two countries. The US Federal Reserve has been shifting its policy towards higher interest rates; Japan’s central bank is firm about sticking to its ultra-loose monetary policy.

With inflation in America running at 40-year highs, the prospect that interest rates will go much higher has made the dollar attractive to international investors.

Elitism: The global financial crisis, says investment commentator Tim Price, “revealed that what we think of as free-market capitalism had, in the Anglosphere at least, by 2008 morphed into something better understood as ‘crapitalism,’ replete with bailouts for the super-rich and austerity for the taxpayer – and everyone else.

“Now that the world is wrestling with the aftermath of the Coronavirus pandemic, and contemplating the chilling impact of the grotesque on global trade, globalization seems to have gone suddenly into reverse.”

Dual citizenship: The number of rich Americans keen to get citizenship or residence of foreign countries has skyrocketed over the past three years, according to an Insider/Yahoo News study. Henley & Partners, a firm specializing in second passports, says the “four Cs” driving the citizenship industry have been Covid-19, climate change, cryptocurrency and political conflict. More than a dozen countries now offer “golden passports” and visas to investment in them. Malta, for example, sells its citizenship for $1.1 million.

Renewables: It’s claimed that solar and wind are now less expensive than fossil fuels. But that’s a lie as the comparisons ignore many costs. The US Energy Information Administration publishes Levelized measures which incorporate initial costs, the lifespan of generation and storage systems, maintenance costs, decommissioning expenses and subsidies, over the lifetime of a power plant. According to their figures, solar and onshore wind farms are four times as expensive as natural gas; offshore wind is six times as expensive.

How to invest now: Investors should now sell into rallies, says Jefferies’ global head of equity strategy Chris Wood. I agree. Shares are now trapped in a bear trend that seems likely to persist for much longer. The S&P 500 index has already fallen about 15 per cent from its peak. Chris reckons that “the minimum decline investors should expect if the Federal Reserve sticks to its current tightening agenda is a 30 per cent decline.”

Energy: The rise in energy prices in Europe has been breathtaking. Prices for natural gas have grown five to ten-fold higher than normal since last autumn. Electricity has followed suit because gas-fired plants often provide the balance of demand when production from wind and solar plunges. Global oil prices are double their 2019 levels.

Sanctions: They’ve delivered the opposite outcomes from those that were expected. Russia delivered four times as much oil to Italy last month as they did at the start of the war in Ukraine because a Russian-controlled refinery in Sicily switched from crude drawn from global sources to Russian supplies.

The residential property market: A forward-looking indicator of US home sales fell to its lowest rate of growth in a decade in April as rising borrowing costs and higher prices kept more potential buyers on the sidelines. The pending home sales index, a measure of contracts signed but not closed, fell 9 per cent.

Transgender acceptance: Britain’s Financial Conduct Authority recently asked companies whether they would object to counting “those self-identifying as women” when measuring diversity in the boardrooms and executive suites of UK listed companies. 438 out of 439 companies said they would object.

The markets: Bank of America, in its latest monthly survey, describes investor morale as “extremely bearish,” with highest allocations to cash since the 9/11 outbreak of terrorism, and the biggest negative view on tech stocks since 2006. One of the few asset classes to avoid a battering has been commodities.

All investments falling: The last time there was an everything sell-off was in early 1981 when Paul Volcker’s Fed raised interest rates high enough to break the back of inflation and turned stagflation into an outright recession.

Europe: Its households are enduring a cost-of-living crisis. Consumer prices are rising faster than incomes.

Food prices: The World Bank Food Price Index has risen 33 per cent over the past 12 months. Its index of fertilizer prices is up 151 per cent.

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