24 June 2021

Where does value lie?

What's the secret to investing for long-term value creation? Brian Tora discusses in our latest article


There is an argument that says that financial assets can be the best hedge against inflation. True, conventional bonds could suffer, but equities have managed to weather previous inflation storms relatively well. Inflation remains a hot topic right now, with the Fed indicating they are prepared to take a tougher line if it persists. Certainly, some people are taking the view that the stock market here is good value.

American investors obviously think so, with a US private equity firm launching a £5.5 billion take-over bid for Morrisons – Britain’s fourth largest supermarket chain. The news sent the share price soaring initially, despite the Morrison board rejecting the bid as inadequate. And all this against a background of retail sales falling as the winding down of lockdown restrictions encourages people to eat out more. But it is hot on the heels of an activist investor taking a stake in Aviva

As it happens, eating out is not as straightforward as we might have expected. A Michelin starred restaurant in London has limited its opening hours because it cannot find sufficient staff to operate properly, despite Covid restrictions reducing the number of covers that can be accommodated. As well as many people leaving the hospitality industry because of the closures necessitated by lockdown, post Brexit it has been harder to find foreign workers to take up these jobs.

Meanwhile, Government borrowing in May took a tumble from last year’s figures, though were still the second highest on record. The highest, unsurprisingly, was May last year when we were in the middle of the pandemic crisis. So, Rishi Sunak is still in the frame to be the Chancellor who has accumulated the most debt while in office. At 99.2% of GDP, our £300 billion debt mountain stands at the greatest amount relative to our economy since the early 1960s.

Bitcoin’s woes continue to mount. The Chinese authorities are clamping down on its use, instructing banks to block payments associated with the crypto-currency. They are also cutting off electricity supplies to bitcoin miners, a term used to describe those endeavouring to create more of the coins through solving computer generated problems. More than half the coins presently mined emanate from China, though this percentage is falling. And these miners use a lot of electricity, so this is important, but unlikely to reduce the supply of coins overall.  

So, perhaps conventional equities provide the best long-term source of value. True, there will be times when they underperform other assets, but where else can you find a potential hedge against inflation and the opportunity to generate a rising income. I recall an advertisement run by M&G shortly after the great stock market crash of 1987. The speed of the collapse in share values put many off investing in equities, but M&G pointed out that £1000 invested in their Dividend Fund at its launch 25 years earlier would then be generating £1500 of annual income, despite the sharp recent fall in its price. Says it all, really.

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