How long ago it seems, that post-referendum panic in the UK stock market. The pound plunged and the crowd ran into “safe havens” in the form of government debt, ditching those risky, tricky shares. On July 13, this column pointed out the folly of this strategy. At that moment, buying and holding the UK government’s 10 year bond guaranteed an annual return of just 0.9 per cent.
This is called the risk-free rate by actuaries and others who should know better. It is nothing of the kind: given the ever-present threat of inflation, these levels of yields could be better described as reward-free. The true risk in holding these “safe haven” investments has been harshly exposed as the long bull market in fixed-interest stocks seems finally to be over. In six months, the price of the 10-year gilt has fallen by nearly 4 per cent.
In contrast to the unsustainable prices of government stocks, the column highlighted what pension fund advisers might describe as “unsafe havens.” The Great Brexit Panic had thrown up opportunities, and the bold investor did not need to be a brilliant stock-picker, or to bet on the next technology unicorn.
Here was the portfolio of half a dozen large, mostly dull companies, chosen not quite at random. They don’t come much duller than Aviva, except that the shares which were 360p then are 478p now. Housebuilders were hit particularly hard in the panic, and Persimmon has risen from £13.60 to £17.40. Lloyds Banking Group shares were 50p then, 64.2p now and BP are 496p from 455p. Even the dowager of the British high street is showing signs of revival, as Marks & Spencer shares are 353p against 291p then. British Land, whose shares fell (but unfortunately not very far) when open-ended property funds had to suspend redemptions, is 636p from 570p.
Buyers who account in euros have similar gains, as sterling recovered its fall against the single currency. In dollar terms, the gains are trimmed by the pound’s 6 per cent decline since 13 July, but as the wave of US buyers of UK assets shows, sterling now looks significantly undervalued from across the Atlantic. When Britain seemed to be going to hell in a (miner’s) handcart in 1985, the pound fell to $1.04. Over the next 20 years, it doubled.
The companies in this unsafe havens portfolio are paying dividends in a cheap currency which will return more in two years than for the entire decade of holding government stock. They are no longer the bargains they were during the panic, but the 10-year gilt still looks too expensive for anything other than a quick trade. Governments round the world are letting their deficits rip, which means much more borrowing. And there’s nothing like a quick paper loss to discourage the buyers from the next issue.
Subsidy farming update
How do you make Hinkley Point’s mythical nuclear power station look cheap? Answer: commit to paying even more for other sources. No, not the Swansea tidal lagoon (not yet, anyway) at £120 per megawatt hour, but the brave new world at Drax, a mere £100. The Hinkley Point juice, if it ever arrives, will cost £92.50 for a longer contract, or rather more than twice the current wholesale price for electricity.
Drax is abandoning the abundant coal on its doorstep, while the rules discourage building power stations to exploit super-abundant gas. Instead, it is burning wood pellets, shipped across the Atlantic and stored in special domes to discourage spontaneous combustion. The massive subsidy is needed to make the sums add up, and Drax shares have perked up no end since the European Commission decided it wasn’t unfair. The customers are not being consulted.
Even all this subsidy farming is not enough to keep the lights on. A cold snap could see businesses being asked to run dirty diesel generators to ease the demand on the electricity grid this winter, while a group of British MPs has concluded that the annual bill for emergency reserves, needed when the wind fails to blow, will be twice the £10-£15 per household official estimate.
The root cause of this nonsense is the 2008 Climate Change Act, passed near-unanimously by parliament in an orgy of self-congratulation, committing to an unattainable CO2 reduction by 2050. Act in haste, repent at leisure.
This is my FT column from Saturday.