Tony Yarrow's Investment Blog - June 2009

Written by Admin, 08 June 2009

Over the last few weeks, against a backdrop of General Motors going bankrupt, rising unemployment, and political turmoil in the UK, there has been a sense of things settling back into a routine. The rate of economic decline is easing, and recent figures suggest that the US recession may be nearly at an end. Here in the UK, low mortgage rates are helping the family budget, house prices have stabilised, at least for the moment, and the rising pound is making imported goods and foreign holidays a little more affordable.

This blog will look at how the next few months might play out, and how our funds TB Wise Investment and TB Wise Income have fared over the last few weeks.


The initial stock market rally lasted from March 9th till May 8th, and was characterised by several days of ‘panic buying’.  After such rapid gains, a period of consolidation was inevitable, but the consolidation, which has taken place over the last month, has been shallow and appears to be over.  Some markets have started to move higher, while others look as if they are about to.  The recovery in emerging economies, notably China, has encouraged investors over the last few weeks. Emerging markets have an intrinsically faster growth rate than developed ones, and they have not had the banking crisis, so stimulation has worked faster.  The stock markets of the regions have responded enthusiastically, and are leading the developed world markets higher.

There is also a view that the recovery in China is being built on a wall of cheap money ‘too much money being lent to the wrong people’ and is not sustainable.

Commodity prices have jumped.  The recession has meant lower demand for oil, copper and other commodities, but supply has fallen too.  Less oil is being pumped and a lot of mining and oil exploration projects have been mothballed.  Now demand is growing again, from recovering China, and from investors, faster than supply can respond. So, in a reprise of 2006-8, mining stocks, together with emerging markets, are once again the market favourites.


Central banks believe that deflation is a greater threat than inflation, and while they continue to think so, they will keep interest rates low. There is still a huge overhang of debt in all western economies, and it must be repaid. Each pound which goes to repay debt doesn’t buy goods or services or invest in the economy, so a highly indebted economy is likely to grow slowly, if at all.

Once prices turn negative, then debt grows in real inflation-adjusted terms, just as inflation reduces debt in real terms.  You can counter inflation by raising interest rates, and you can counter deflation by lowering interest rates, but only to the point where the interest rate is zero, which it nearly is in the US, UK and Japan. After that you have to print money, otherwise known as ‘quantitative easing’.

Also, when prices are falling, there is no hurry to buy. The longer you wait, the cheaper things get. So a deflationary economy is a sluggish one. This happened in Japan in the 1990s

The UK Government is as indebted as they come, hit by collapsing tax revenues, rising benefit costs and the bank bail-out.  The Government must cut its costs radically, and may have to raise taxes as well, though in doing so it would risk depressing the economy further. The Treasury’s forecast for growth in 2009, made in the Budget in April, of minus 3.5%, is once again proving over-optimistic. Falling government spending won’t help the economy to recover.

But inflation could return all the same. Printing money causes inflation, and so do rising commodity prices. Oil was $140 a barrel this time last year, $ 30 per barrel in December, and is now $68. Once last year’s high figures drop out of the equation, oil’s contribution to the RPI will once again be positive.

If inflation rises, then interest rates will have to follow. The likely result would be further weakness in the residential property market, with rising repossessions and forced selling. Residential property prices are still well above their long-term relationship with incomes, and have some way further to fall.


Probably.  The 3500 level, which the UK stock market touched in early March, reflected a period in which the banking system nearly collapsed, and everyone stopped spending money, causing a much worse recession than anyone had expected. An equivalent level of fear and pessimism would be needed to take UK stock market back to that level, and for that you’d need further widespread bank failures, or the insolvency of a medium-sized country, or some other seriously disruptive event.

On the other hand, investors appear to be getting a bit over-excited about the prospects for recovery.  During the rally, the shares of large economically-insensitive companies in areas such as water, electricity and pharmaceuticals have been left behind.  These are still very cheap, and offer a defence against the economic squalls which lie ahead.  And, there are always innovative well-managed companies in all sectors which can make headway in most economic conditions. Even after the recent rally, we expect shares to give a better return than cash and fixed interest over the next year.


The Financial Times publishes a list every Saturday of companies whose directors have bought or sold shares in their own companies. Since last summer, the overwhelming majority of transactions have been purchases, with almost no sales.  In the last couple of weeks, the trend has remained strongly positive, though not quite as extreme as before. Last week there were 29 purchases and 8 sales, and the week before there were 32 purchases and 13 sales. These numbers reflect our view that the market is still good value, while not as abnormally cheap as it was.


Prices are still falling, but rather more slowly than before, and buying interest is picking up. Commercial property prices are down around 47% since July 2007, while residential prices have fallen by barely half that amount, which leads us to think that the commercial market will hit bottom considerably sooner than residential, and that the bottom in commercial is not far away, possibly no more than a few weeks.  We are monitoring the situation carefully. If you switched your pension fund into cash on our advice a couple of years ago, the time to consider returning into property is getting nearer, and we will be in touch.


This blog does not aim to express political views, but as fund managers we are affected by government policy, and how the UK is perceived abroad, so we try to anticipate what may happen.  In the last few days, the pound, which had been rising strongly, has fallen, at least partly in response to the chaotic political events of last week. Gordon Brown isn’t responsible for the world economic crisis, but his government’s policies have made it worse for us in the UK.  Under the slogan of ‘balancing the books over the economic cycle’ the government has consistently spent more than its revenues, while taking on additional commitments to the Private Finance Initiative, civil service pay, pensions etc, all of which have reduced the options available to tackle the problem.  Wasteful government spending (the MPs’ expenses are the tip of an iceberg) needs to be tackled radically. Gordon Brown, who believes in big government, is unlikely to do what’s needed.  He is also unlikely to resign, as he expects his and his party’s fortunes to revive with the economy next year, also because he doesn’t understand why he’s unpopular.  The result is that his badly damaged government will soldier on till next year’s General Election if it possibly can.  The pound may be weaker as a result.



Since the rally began in early March, TB Wise Investment’s share price has risen in value by almost a third (actually 32.3%), compared to the Active Managed sector average (+18.4%) and the UK stock market (+24.0%).  Almost all of these gains were made in the early part of the rally, up to May 8th. The pound has been rising strongly during this period so it has seemed right not to put too much money overseas, but that may be changing.  We have started to take profits on some of the more ‘cyclical’ holdings, and are gradually replacing them with more ‘defensive’ assets.  We are also gradually reducing the proportion of the fund held in investment trusts, currently around two-thirds of the fund value.  We continue to focus on top-quality managers with plenty of experience.  We don’t expect the extraordinary gains of the last few months to be repeated any time soon, but see plenty of value and quality around all the same.


TB Wise Income is up 27.5% since March 10th. Some of the fund’s holdings have more than doubled during this period, but investors remain wary of many income-paying assets, so there is still a lot of value in this area.  Interest rates are likely to stay low for the next year or two, until an economic recovery is well-established, and gradually we expect investors to venture from their deposit accounts in search of income-paying assets such as those which TB Wise Income holds.  So there should be ample scope for price rises from here.

We are acutely aware of how far the prices of our funds remain below their levels of a couple of years ago, despite the recent bounce. However, with the UK stock market index at the same level as it was on March 6th, 1997, there are still plenty of opportunities, even though they may not all be obvious now. Our aim is to maximise those opportunities in the coming months.



UK-shares in credible businesses (banks still not included in this category) on a two-three year view-or longer.

Emerging markets and mining stocks - but not at current prices

Asia - on a two-three year view

Commercial property - but not just yet

UK index-linked gilts - but not just yet

Corporate bonds - but not the lower-quality bonds, including bank bonds


UK Government stock (gilts) because of over-supply and potential inflation in two or three years’ time.  But prices have been falling recently, so gilts could potentially become interesting again.

Residential property

Banks - though some are unquestionably better than others


We will be holding our annual seminar on Thursday October 8th, at the Wychwood Golf Club, and hope you will be able to come. An invitation will be on its way to you soon..

With best wishes,

Tony Yarrow
This blog contains the personal views of Tony Yarrow as at 8th June, and does not constitute financial advice.

Tony manages TB Wise Investment and TB Wise Income.