Page 25 - DIY Investor Magazine | Issue 37

Then there is the valuation; for all sorts of reasons, the US market trades at a big valuation premium to other world markets around the world. CRH is interesting, because along with other companies, it moved from Ireland to list in the UK for the same reason - to get a better rate, larger market. So the UK has benefited in the past, but now we are seeing one or two companies move to the US. JC: That’s interesting – so in future, will companies shop around for an exchange that will value them as they wish to be? SG: It’s possible; hopefully, these pricing gaps will narrow and change over time, and it’s partly to do with the investor. Pension funds have sold down from owning 40% of the UK market a few decades ago, to about 4% today; historically the biggest investors in the UK, are now pretty marginal. That can only go so far, and as the marginal investors or the companies themselves are taken over or approached elsewhere, that should lead to the valuations of shares starting to go up. If the big holders have effectively stopped selling, the remaining buyers should push the prices up. I’m hoping for arbitrage, a normalisation of prices over time, which will remove the pressure to move exchange to get a higher rating, and possibly US valuations might come down. So at the moment it’s an issue; whether it remains an issue in five years’ time is an open question. JC: What are your thoughts, more broadly, on the economic picture for the UK, which seems equally mixed? The International Monetary Fund has been notably negative on Britain’s outlook, yet recent data suggests the UK economy actually grew in January – only by 0.3%, but it’s still growth, and going in the right direction. Will this have much impact on market sentiment or is it priced in already, do you think? SG: It’s not solely a UK phenomenon; growth has bettered some pretty gloomy forecasts in other big economies as well. It’s encouraging that the UK avoided recession, but it’s a double-edged sword. Interest rate expectations had been coming down since the Kwasi Kwarteng budget, as people worried about growth and the outlook, and how far interest rates might rise. If the economy is actually not that weak, then interest rate expectations could go up again. But it’s generally good news that the economy isn’t contracting, and you see that in the labour market, we’re not seeing rafts of job losses. Actually, we’re seeing quite good wage increases coming through, so the outlook for the consumer might be improving, which is encouraging. The Bank of England and other central banks have to tread a narrow line between slowing the economy to control inflation, yet allowing enough growth to avoid a deep recession; so far they’ve done OK, but it’s a very difficult balancing act. JC: It’s certainly a tightrope walk. Perhaps a greater impact on sentiment will be the reopening of China’s market following the Communist Party’s strict COVID-19 restrictions; surely this is good news, Simon - China back open at the heart of the global economy again? SG: Yes, it’s good for world trade and good for the supply of goods; companies had all sorts of issues when they couldn’t get products out of China. It’s a boost to demand for commodities in particular; China was a very difficult area in terms of growth for last year, and this should be helpful for the global economy, although we have to watch the inflationary risk if China’s buying lots of energy, oil and gas and so on. JC: And what of your FTSE 100 investments; we’ve discussed how the FTSE is much more globally focused, so the oil and gas companies, the banking companies and others as well, surely this is good news for them? SG: Yes, absolutely; we have many multinational companies. They tend to be more regional multinationals, if you like, rather than companies that are necessarily importing goods from Asia to the UK. But, yeah, a stronger economy is definitely helpful. JC: If you’re an Australian miner, you’re probably quite pleased that China’s back open again. SG: Oh, absolutely. The iron ore price, for example, has gone up significantly from where it was a few months ago. JC: Finally, your thoughts on the portfolio itself, where you see the current best opportunities for a value investor, Simon? 25 Apr 2023 DIY Investor Magazine ·