Bonkers Politics – Dynamic UK and Dynamic Asia Fly – FTSE 250 Poised

Fri 05 Jul 2024

By Brian Dennehy

Access Level | public

Market commentary


quoteAs investors, most of the time you can ignore the ebb and flow of politics. However, the last few weeks have highlighted that politics will be a significant trigger of the volatility which will mark out the new investment cycle for years ahead.

In France, Emmanuel Macron has had a strop and risks making France ungovernable but for him ruling by diktat. That will only work for so long, and likely be ended by one or more of farmers closing down transport links, urban youths rioting, or bond markets imploding (a la Truss).

Macron is not alone. Rishi Sunak was equally reckless (from a Conservative Party perspective), and Joe Biden, unless he withdraws from the next US election, is being mindlessly self-obsessed and handing the result on a plate to Trump.

Or perhaps they all realised that they are not prepared to take the extremely painful solutions needed to deal with mountainous debts, where all major Western nations are living significantly beyond their means, bar Germany. The interest payments on this debt, year after year, persistently suck oxygen out of the economy, which stunts economic growth and has real impacts.

For example, average UK wages haven’t changed since 2007 after allowing for inflation. And over the years we have shown much starker numbers for the US, creating armies of disgruntled voters to elect Donald Trump in 2016, with similar extreme outcomes across Europe. More than a decade ago we highlighted that the patience of the 99% had limits (see DW blog, People Are Angry). 

The ideal solution is more growth. This will generate more taxes, reducing day to day spending deficits as well as accumulated debt, and enable greater government investment in key areas e.g. technology, infrastructure, health, education.

But from where will that growth come? The new Labour administration has given no idea of their plans beyond warm words. We should all wish them well in working up the detail, but the precedents are not encouraging, where the Truss debacle is merely the most memorable U.K. example. A rich mix of policy initiatives will be needed, and it is not clear these will be allowed to blossom through the thick weeds of embedded ideology, at least not within the 5 year democratic cycle.

This is a problem throughout the West. Leaders brave enough to do what is needed will likely only emerge mid crisis, and once the soft political middle is largely eliminated.

The good news? That Armageddon could be years away, so let’s put that to one side for now, and recognise that there remain vast sums washing around the world looking for a home.

Those sums should be drawn to the U.K. (very good value, new political stability) and across Asia (much less debt on the whole, good value, widespread investor-friendly reforms). And as Asia continues to grow, so will demand for commodities (mostly in short supply, which will push prices higher) and commodity equities. A number of the big commodity beasts populate the FTSE 100, and many more sit in emerging markets, where Brazil stands out – very cheap, great dividends.

On cue, in this month’s Dynamic Portfolio reviews there are updates for the UK, Asia, and Commodities (as well as two Bonkers portfolios and Dynamic Cautious).

Dynamic Asia is up just over 9% over the 6 months, outperforming the index, similarly with Dynamic UK All Companies, up nearly 10%. The former has performed 14x better than the index since inception, and the latter growing nearly 4x better than the index (the FTSE 100, with income re-invested).

Dynamic Commodities fell slightly and underperformed the index over their 3-month review period (most other portfolios are 6 months). All the new selections are gold funds. Despite the last quarter being modestly disappointing, it is up an extraordinary 22x the index since inception at the start of 2009.

Returning to the UK, the FTSE 250 is today at exactly the level which we projected when it was at a relatively low ebb last November, on which see this teleconference or this blog. I said that one way in which we could be wrong would be if it flew up through 21000, in which case a new all-time high becomes possible, more than 15% higher. Keep an eye on this in coming days. If it is better to travel than arrive, expect some profit-taking in the days ahead, after today’s knee-jerk enthusiasm. In contrast, if Keir Starmer excites markets today and over the weekend, the FTSE 250 could keep flying, with little hesitation.

It might also be sensible to see how markets respond to the French elections on Sunday. It is difficult to foresee any good outcomes taking a longer view.


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