With prices and wages still rising sharply — dragging interest rates in their wake — younger colleagues sometimes ask me: “What’s it like to invest during an inflationary period?”
Having recently become a grandfather, I am tempted to don a pair of slippers, suck on a pipe, gaze through the window and say something whimsical. I limit myself to the whimsy.
“Every morning, whatever the weather, new shells are washed up on the seashore, ready to be picked if you’re early enough,” I counsel. “So it is with stocks. Get up early, work hard and you can always unearth bargains — regardless of the economic backdrop.”
Some days, confronted by a mass of red portfolio numbers, I offer a less encouraging, rather grumpier reflection. “The thing about bear markets is that they’re very boring,” I declare, “and the boredom is punctuated only by moments of pain as a stock or the market periodically lurches down.”
Both sentiments contain some truth and, as long as I say them with enough gravitas, a polite colleague will move on. But the exchanges have got me thinking.
Age does not guarantee wisdom — certainly not in investment circles. There is an assumption that time and experience bring clarity of vision, but they are just as likely to bring baggage and prejudice.
A typical habit of the old is that they become increasingly bearish. Part of the problem is that they are comfortable and do not want to risk losing money, as they are unsure they will be around long enough to claw it back. I regularly encounter this pessimism among professional investors, committee members and economic commentators.
It is often associated with a cognitive bias that leads us to view the past as better than it was. Psychologists call this “rosy retrospection”. By comparison, today’s world seems inferior; tomorrow’s fraught with risk.
The UK economy is arguably the number one victim of this malaise. As it has spread, this narrative has had a self-feeding negative effect on the economy.
UK investors and institutions have been selling their exposure to UK stocks. In particular they have shunned smaller, domestic UK companies. The Alternative Investment Market (Aim) of small companies has fallen by 30 per cent in five years.
The requirement for greater liquidity in underlying holdings, following the collapse of funds run by Neil Woodford, has only exacerbated the problem. The market is now failing in its fundamental role of providing equity finance to the next generation of UK businesses.
This worrying dynamic ignores a vital truth, which is that the old bears are largely talking nonsense. The persistence of low valuations belies the fact that the UK is in a much stronger position than it was, say, 50 years ago, when many of the most vociferous doom-mongers learnt their economics.
By way of illustration, consider the strength of UK universities — 80 per cent of research submitted to the most recent Research Excellence Framework, a process of expert review, was classified as “world-leading” or “internationally excellent”. Look at the country’s creative industries, which generated more than £100bn for the economy in 2021 alone. Then there is unemployment — 6 per cent in 1978, 12 per cent in 1983 and 4 per cent today.
The UK’s capacity for entrepreneurship and innovation is reflected in the many promising start-ups specialising in emerging technologies such as artificial intelligence, smart food, nanotechnology and gene therapy.
I can offer many examples of companies I find exciting today. From within our own portfolios here are three — all Aim stocks.
AFC Energy (the letters stand for “alkaline fuel cells”) makes hydrogen-powered generators. Visit any building site or pop concert and you’ll find noisy generators chugging away, belching diesel fumes. With so many organisations looking to reduce their carbon footprint, governments and other contractors are demanding a zero-emission solution. Last month, AFC and Speedy Hire announced a joint venture that should see its H-Power Generators working quietly away on sites across the country within months.
Accsys makes “accoya acetylated wood”. Essentially it treats soft wood with a chemical akin to strong vinegar that protects the wood from rotting when wet, extending its lifespan by decades. The business has had some production challenges but a joint venture with the Eastman Chemical Company bodes well for development of a new plant in the US.
Vertu is a very different business — the fourth-largest motor retailer in the UK, with over 180 franchised showrooms. As people switch to electric vehicles, they want a test drive with a salesperson who can explain things and reassure them. Vertu does that well. It is buying smaller distributors without the infrastructure to market themselves cost effectively.
If these companies can thrive now, just think how they will perform when the cycle turns and the pessimism lifts.
In the late 1970s and early 1980s, when memories of blackouts and three-day weeks were still relatively fresh, the nation’s collective idea of entrepreneurship and innovation was probably best encapsulated in Arthur Daley, television’s fictional dodgy dealer, and the Sinclair C5, an electric tricycle that became a byword for commercial failure. These companies encourage me to believe things have moved on.
I do not deny the UK has problems. Adopting a rose-tinted view of the present is just as bad as adopting a rose-tinted view of the past. But investors should derive important lessons from all this.
The first is that we should be careful who we listen to. I appreciate my young colleagues’ interest in my opinions, but I suspect what they can tell me is frequently of much greater value. Older investment “experts” should welcome having their decisions challenged, which is why I am a such a fan of reverse mentoring. I am sure I have learned more from my younger colleagues than I have taught.
The second lesson is to be conscious of our own baggage and prejudices. Exaggerated fear translates into excessive caution that in times of high inflation can seriously erode your wealth. This caution is why many investors are missing out on the opportunities that now populate the UK market.
Overseas investors are beginning to see value here — they have spotted the same sort of companies that they have in their market can be bought more cheaply in the UK. Private equity buyers are now snapping up bargains. Last month one of our holdings, DWF, the UK’s largest listed law firm, was bought at a 72 per cent premium to the group’s three-month average share price.
Most of the acquisitions we see are at significant premiums to the prices they were trading at prior to bids. UK domestic investors should be seizing these opportunities, too.
James Henderson is co-manager of the Henderson Opportunities Trust and the Lowland Investment Company