A year ago, had you been rash enough to buy a 10-year UK government security, you would have known that the yield of a little over 1 per cent would likely lead to a loss, after inflation, were you to hold it to maturity.
Twelve months on, and your total return from the investment is a remarkable 10 per cent. The yield is now little more than 0.5 per cent, reflecting the rise in the price of the bonds over the year. Those of us who described the 2018 buyers as preferring hope over the UK’s inflation experience look foolish today.
In an age where investors will buy bonds with negative yields, the return on UK gilts may be derisory, but it is still at least positive (before inflation) so perhaps the prices might go up further still. Yet the risk in buying these so-called risk-free assets increase with each rise, as valuations become ever-more stretched.
Compare that with some of the unloved beasts in the equity market. HSBC, Rio Tinto, BP and BAT, with a combined market value of £362bn, together yield more than 6 per cent on current dividends, declared in dollars, so they pay out rather more if sterling weakens.
Put another way, if the payments are only sustained, these shares will return their whole capital investment in dividends in about 15 years. The government bond, in contrast, may have paid a total of less than 8 per cent in interest over that period.
This glaring mismatch has something to do with fear of a humdinger of a world recession, but has much more to do with factors that scarcely bear on investing. Bond prices are high because central banks have wrecked the market by slashing interest rates and buying their own governments’ debt in vast quantities.
The collapse in interest rates is preventing banks from making their traditional margin, while mining is dirty and polluting. The prices of oil and tobacco stocks are depressed because so many of their natural buyers have been warned off the course by special-interest lobby groups.
These are the ingredients for unusual investment opportunities. Banks will find other ways to extract profits from borrowers. Iron ore remains the backbone of physical development. Tobacco companies are proving more resilient than some of their customers, while most projections make oil and gas the dominant sources of energy for decades to come.
Perhaps we really are on the edge of a slump to make the 1920s look mild, which is the only justification for the $15.6tn of negative-yielding debt worldwide. None of the businesses above is a risk-free investment, but together they look a better bet than the guaranteed return-free alternative of holding UK government stocks at today’s prices.
Marks & Who?
So farewell then, Marks and Spencer, elbowed out of the FTSE 100 by the likes of Evraz (Russian steel), NMC Health (Gulf healthcare) and DCC (support services), reflecting the impermanent nature of business. When DCC was formed in 1996, M&S declared profits of about £1bn and its market capitalisation touched £14bn.
It was run out of a Lubyanka-like building in London’s Baker Street, and since that peak the business has defied all successive managements’ efforts to stop the rot, culminating in the latest desperate focus on food retailing, just as competition there looks fiercer than ever.
Clothes retailing is hard, but decline is not inevitable, as Simon Wolfson has demonstrated at Next. The contrast is particularly painful. Where M&S had long-term property commitments, Next has short leases, allowing flexibility for changing conditions. While M&S struggled with new technology, Next transitioned its clunky mail order catalogue into a competitive online offer.
Only three years ago, M&S was buying in its own shares at more than twice the price of this year’s 185p rights issue. Meanwhile, Next has demonstrated rare intelligence with its buyback programmes, buying shares only when the price seemed more attractive than the returns from expanding the business. Since 1996, its share price has multiplied ten-fold.
It is possible that the current M&S management, running a company with a market cap of less than £4bn, will succeed where their predecessors failed, but the omens are not good. The key question is: if the business disappeared entirely, would you miss it? For too many consumers, the answer is: miss what?
A full list of Neil Collins’ financial interests can be found at www.ft.com/collinsportfolio
