Sunday Supplement – 28/11/2021

Nov 28, 2021


Sunday comes round at the same rate every week – it is our perception of time and space (and also, I think, how busy the week is) that makes it seem faster or slower. I think we only notice when it is faster, and it has definitely been a busy week at this end with several events in the calendar that I wouldn’t have missed!

Had a great evening at the Kent Property Meet on Wednesday and got to give a shoutout to those guys – a really great quality independent property meeting which has that great blend of experienced attendees and sponsors, new blood, and those early on in their property careers (OK, journeys……I know that’s a “no-no” word for some!). It’s a decent drive from sunny Solihull, but worth it. I hadn’t been for a couple of years and it feels like a few months ago and a few years ago at the same time (I’m sure that didn’t used to happen before covid)….

Then had another outing to London to the Central London meet – another highly recommended one, which attracts some big names. Lots of content (and only a shade of shameless self-promotion….) – but in seriousness, it was great to connect with some faces and names that I’ve only known as virtual faces on a zoom call or whatever – it was also great to see some old friends too.

Rounded off a three-peat of three meets in three days with PIP Bristol, which was fabulous as usual – brilliant to hear what two of the members have been up to and they shared lots of knowledge – and then the ebullient Jay Howard wowed the room with a bucket load of auction tips, tricks, and inside knowledge. Mega value as always.

The miles, drives, trains and tubes give lots of time for reflection – it isn’t always easy to decompress but I’ve always managed to get to sleep fairly easily when the head hits the pillow every night. Sometimes I’ve struggled to STAY asleep which isn’t ideal – particularly since covid first hit – because powering down the brain hasn’t been the easiest. I know this is a widespread phenomenon and a hangover from the pandemic, which of course, this week, has been deemed to be “not over yet”. I’d see the market reactions this week as another piece of evidence, if it were needed, that markets are more about sentiment than they are about reality – here’s a couple of things to think about:

So far covid and the worldwide governmental response to it has been highly beneficial to stock markets worldwide – so does a gap downwards even make any sense? I’d argue not.
The new variant in question is, as far as I can see looking into it, a variant of concern. The threshold is not that high – significant enough genetic changes which affect transmissibility, disease severity, immune escape, diagnostic or therapeutic escape, and causing significant clusters or community transmission – it then needs one of increase in transmissibility, increase in virulence, or decrease in effectiveness of public health measures.

My “covid dam” broke earlier in the week and I was highly motivated to write a long post about it which you can find on my timeline. It was better received than I expected as I know I have a few facebook friends who are on the highly sceptical side of the argument – I’ve enjoyed engaging with them throughout the pandemic and in the same way as I believe it is important to read across the spectrum from the Guardian to the Telegraph, or even from the New Statesman to the Spectactor, (NOTE: Not to actually get news – to understand what outlets with clear political bias are communicating to their readership, and to consider how that might influence people’s behaviour in the “now”). I like the sceptics who back things up with evidence and articles – I’m not talking from but from sources that are considered highly reputable e.g. the British Medical Journal.

Where I struggle is the mathematical basis of some of the arguments used on all sides. I started my rant about covid cases and their effectiveness for assessing the current penetration of the pandemic (spoiler alert – a pretty rubbish metric) – but likewise, some of the maths used on the sceptical side of the argument is pretty horrible. I had a long chat with a highly intelligent but sceptical person this week and, I’m sad to report, the mathematical logic base she thought she was operating from was hogwash – I described it is a piece of swiss cheese with holes so large I could drive an HGV through it. This is why I thought I would upset everyone, but ended up getting far more positive comments than I thought!

Anyway – it isn’t going to be a supplement dominated by covid analysis – this week. Let’s remember a few things that have helped me get through the pandemic. Firstly, let’s not worry about things we can’t control. Let’s instead plan how we might adapt to them, and where the advantages or edges might be. That’s a much better use of time and also emotional energy. Secondly, let’s make our own individual choices and plans around further threats to our health and the health of our nearest and dearest as they emerge. Thirdly, let’s concentrate on what’s NOT been said so far. Alpha (first main variant) killed far more people per case than Delta – for 3 reasons (that are very difficult to separate): 1) Testing wasn’t as prevalent 2) There was no vaccine during the first wave 3) It was less transmissible but had a higher fatality rate.

3 is the one you won’t hear a lot about, although I am not sure why. To the best of my knowledge, based on everything I have read, the highly typical mutation trades-off between transmissibility and fatality. Any good parasite can’t kill its host too quickly, of course. The fear is of course a vaccine not working (the reality is that it will have a lower effectiveness, not that it won’t work), but this could be one MORE reason as to why not track the case numbers obsessively. We also have further treatments now for people who have tested positive, which are boasting some impressive numbers. IF Omicron is so much more transmissible, at some point this could even end up being a good thing, if the fatality rate goes much lower – offering antibody protection. All the news around it has been bad (and that’s natural in these situations) but there needs to be an element of balance and also an element of hope, apart from anything else, that we will get to the other side of this pandemic.

South Africa itself so far has had 3 waves of cases and this very recent development looks like the very start of the 4th. I’ve used the graph as this week’s graphic. You can see a quick acceleration in the past week, but can also put everything into context. South Africa, so far, is 54th in the world table of deaths per capita (really the only way to measure country to country, although every country has a different way of measuring covid deaths, so really we should be looking at excess deaths per capita) – the UK is 30th, the US is 20th, and 8 Eastern European countries are in the world top 10 on this measure.
So – that’s some context and some logic. 3-4% was the determined haircut for world equity markets in the week, and I’m sticking to my conclusion here – likely a buying opportunity if you are looking to get stuck into stocks, although there could be further drops on more bad news before a bottom from the Omicron news. No sleep lost here just yet though.

So, I’m glad I’m not talking about covid……..but this week I wanted to pass on some news on the ground which I’m hoping will be seen as a positive to many supplement readers. It’s the first week (well, probably been about 10 days now) of a real uptick in activity for many months in our investment companies acquisitions pipelines. We’ve done half a dozen deals in 10 days! One we knew was coming and we had been working for a month or so, but the others are all from different sources, different areas, are different things and there’s also been one or two that we could have got but we, or our partners, haven’t got the right financial structure to take advantage of. These 6 deals are real “bread and butter” stuff – the sorts of things we’ve been doing for years, deals in any market. The things that others don’t want.

This stuff has been hoovered up for the past 18-20 months at prices above what it has been worth, AND we have not devoted as much resource to searching and prospecting as we are now. I am confident we didn’t miss much, but I also know that we missed some things, although by devoting our resources elsewhere, other things came from that that otherwise wouldn’t have transpired. At a loose estimate, the half a dozen deals in question will have the following profit on costs: 100%, 100%, 50%, 50%, 40% and 40%. So – we are not having to operate to lower margins either – something we have been very keen to resist.

There are also 2 deals in the pipeline (that have come from devoting resources elsewhere) that on an absolute basis will make more money, because they are much bigger – but the margins are not quite as healthy – one has a margin that will sit in that list, the other has a lower margin – but the quantum will make for nice solid additions to balance sheets, so there is a little bit of compromise there. The one with the lower margin requires less effort in the now so that is a handy one to add to a portfolio and manage the asset on an ongoing basis.

It is no doubt a touch of the confluence of circumstances. Firstly, mid-November things seem to heat up for us, generally, historically. We put at least as much work in in October and our production level was nowhere near this good. Secondly, we get further away from bounceback loans and easy money as the weeks and months go on. Whilst many are trying to acquire, refinancing is still very slow and this slows down the velocity of investment money in the system. Thirdly – and perhaps most importantly – there is a bit of an easing in the market. October saw plenty of unsold auction stock – and whilst most decided to “go again” rather than take a post-auction offer, the auction “room” doesn’t respond well to stock that it has seen before, and there are only so many idiots out there at the end of a mouse!

It will be impossible, from a data perspective, to parse out the increased stock numbers against the seasonality backdrop. It is a piece of analysis that I’ve never seen done with a satisfactory methodology. The ONS manages some decent seasonal adjustments but I’m not convinced you could just apply those over to auction with a particular degree of certainty. But, overall, I wanted to share the good news.

I have, also, thanks to a quality conversation this week, been informed that one of the largest asset managers in the country has been promised and is gearing up for a steady stream of repossessions in 2022 – 300 per month in Q1, 600 per month in Q2-Q3 (possibly reaching 750 per month). Not all the stock in the world, but this is one company, and is coming from a very low base in the past 2 years of course. That would be somewhere around 6750 units, or in other parlance, somewhere between 2 and 3 months worth of auction stock, on its own. We know from last week that these cases in arrears are out there (>10% of arrears).

Even if you read this and think – bleurghh, repos – hard to transact on and often sell a bit too high – it is the supply side alone that might well be of help to you and distract some of your competition or have them investing funds elsewhere rather than bidding up things that you are interested in. Plus – don’t be such a neghead 🙂

I’m going to wrap up this week with a bit on inflation and interest rates… Kent this week it was succinctly put by the in-house financial advisor/wealth manager. For the first time in 30 years the advisor felt she could predict with certainty that rates were actually going up! However, she raised the very valid point about the base (pun intended) from which we are starting. Her number for the end of next year was 0.75% – and I’ve stated that my range is 0.5% – 0.75% for end 2022. Markets still think 1-1.25%, and it is a brave person who disagrees, but I still can’t see the justification for the most aggressive rate rises in over a decade, nor can I see the underlying economic growth and productivity to support such an aggressive rise.

Inflation was above expectations this month, (market expectations anyway) – realistically, what we all knew came into the figures with a bang, in one month. There will be other spikes beyond this as the figures lag behind real time. The next step, a basically guaranteed rise in rates next MPC meeting, has to be done as part of the poker game of being a central banker. They NEED to keep everyone guessing, but they also need to offer information to the market and inspire confidence that they are on top of everything. Their hesitancy to put them up at the last MPC meeting tells you what you need to know – they don’t want to do it. That’s what their language and body language says, at the moment, because they know the underlying fundamentals are not strong enough.

I’m staying with my predictions and I am happy with them. My other tenet is that the government want 3-4% inflation for years if they can get it – they just need to pretend that they don’t! We still need positive inflation for positive reasons – and I am not convinced that the productivity puzzle is solved yet, or that we have had that boost in productivity from covid – just look at the summary of the latest productivity “flash estimate” from the ONS:

In Quarter 3 (July to Sept) 2021, output per hour worked was 0.5% above levels prior to the coronavirus (COVID-19) pandemic (the 2019 average) despite a 1.2% quarter-on-quarter fall.
Output per worker was 1.1% below the 2019 average level despite the recent rise of 0.5%.
For most industry sections, output per hour worked in Quarter 3 2021 was close to pre-coronavirus levels, with some re-allocation of activity away from lower-productivity industries in favour of higher-productivity industries.
The within-industry productivity growth contribution increased slightly and remained close to pre-pandemic levels, suggesting there does not yet appear to be a long-lasting negative productivity effect of the pandemic.

Good news overall, but clearly no forging ahead in productivity thanks to working from home, for example, which has long been promised as the second coming of productivity increases. We need the noise to die and hybrid working to settle in – but if productivity does NOT come, this will be a big reason for firms to get people back into the office more aggressively than they are already trying to.

I’m still searching for the economic “genuine good news” that would justify a decent growth rate. The scarcity economy will make some things work – and moving resources from low productivity to high productivity is positive. The rest, let’s face it – isn’t.

I’ve predicted that we would have a “bad news winter” (this may be a total fugazi, because perhaps every winter is a bad news winter – although the stock market tends to go OK over this period, so perhaps not) – and we are definitely a couple of articles into it. I was surprised to hear people talking about lockdowns as a real possibility – the concern is that the political lords and masters are likely to do what the majority want to do, and with people quite clearly still too scared to use hospitals and GPs, the NHS pressure is difficult to find the real-time data but will only ever be “severe” or “critical” at this time of year anyway. Any business would after all want to run at 97%+ of capacity at the worst time of year which is the peak of winter (and we aren’t there yet) – the last number I heard was 92% which is about in line with this time of year.

I’m sure the Express will also have some bold weather predictions – although Storm Arwen is far from a joke, many Scottish homes without power and a very serious wind speed of up to 90mph – we make as much news in the UK it seems over yellow weather warnings as red ones, but this “danger to life” warning is a stark one. It is how quickly and how harshly we get from A to Z (Or A to about K or L, usually) that will define some people’s winters, for sure.

Anyway – until next week, stay positive, and redouble your efforts if you are out there looking for stock at the moment – it IS there, but you’ve got to go out and get it done! Stay safe.