Stories sell, digital gold, and disagree but commit

The Weekender offers my perspective on market developments and their potential broader implications, written most Friday afternoons. If you'd like this delivered to your inbox on Saturday mornings via Northern Trust, please sign up here.

GRANOLAS and New Zealand’s best invention

My mother-in-law’s godfather,?Bill Hamilton, was a New Zealander who invented the jetboat. A Kiwi also invented bungy jumping, jogging,?jaffas, the jet-pack and allegedly flying itself. Yes, the Wright Brothers may not have been the first to fly, but the second, behind a sheep farmer from Timaru, New Zealand, called Dick?Pearse. But one of New Zealand’s greatest inventions and exports has to be tin-canned infant milk-powder. Once known as Glaxo. Yes, what’s known today as GSK can trace its roots back to humble beginnings in Palmerston North, NZ. Not bad for a company that went on to save millions of lives and at one stage produced?80%?of the world’s antibiotics. Why raise it today? Well, a few weeks back we highlighted how Novo-Nordisk, maker of that other revolutionary drug, GLP-1, added the market cap of GSK in just?two?months!?And now it, along with GSK (and four other healthcare names) have been added to the acronym GRANOLAS – Europe’s version of the Mag7?–??with similar performance but with about half the volatility. Now, typically I deplore (new) acronyms. Unlike new medicines, the world doesn’t need any more of them, but I’m prepared to embrace this one. For not only does it involve one of New Zealand’s finest exports, it may help lower the cost of capital for businesses that actually?do good?in the world – like helping prevent covid, cancer, diabetes. Two of them might even help fix the looming demographic crisis by improving your chances of finding a mate.?“Because you’re worth it”. Now that’s a story worth selling.

Pick the tide, then turn up

We’re all tired by acronyms but some do help?tell a story. It's well known that humans prefer simply packaged and easily processed information. Scientists label it ‘fluency’. Simple language that’s easy to understand removes mental load and taps our reward networks. We get a dopamine hit. Simplicity sells. An idea not lost on the likes of Hemingway, Picasso, King Jr (‘I have a dream’), or Einstein, who used a simple formula to describe the complex theory of relativity. It’s also not been lost on markets! Researches at Princeton found companies with simple and easy to remember names/tickers performed better in the days after their IPO than those with trickier names. When you can wrap a story around a number of different companies, and label it with a catchy acronym, amazing things can happen. Think of BRICS, FAANG, MAMAA, TINA, NIFTY50 or even ESG. Many bemoan the idea that investment management is run more by marketeers than investors. But it’s a fact. Stories matter. Numbers follow narratives. These stories, these themes can at times even arrest the dominant macro narratives (see AI for clues). Such is why I believe thematic funds and active ETFs are structural growth markets and investors need to think horizontally as much as vertically when assessing the drivers of price action. It pays to stay on top of emergent themes and invest accordingly. After-all, the single best strategy for business and investing success has always been picking the tide. And then, turning up.

New stories

We’ve discussed Japan moving from a stakeholder to shareholder economy for some time, a story which I believe has years left to run. Whether this is the intent or not, an outcome of higher equity is improved collateral value. And remembering that debt is only an issue if there is too little capital against it. Improving equity values helps improve the leverage situation and can become self-fulfilling. This idea is clearly not lost on the Chinese (more below). It’s also not lost on Korea who this week announced its own Value-Up campaign that looks very much like the Japanese model in terms of forcing disclosure on companies to improve returns, but goes further to provide tax incentives for those that do. I was a little surprised to see so little made of this outside of Korea, having to remind myself that no-one cared when we first discussed this idea with respect to Japan last January. Why? Because the story everyone told then was that Japan 'will never change'. Well it has. And it looks like Korea, and possibly China are changing along with it.

China: lacking new negatives

While I’m not getting excited over the import figures (they’re flattered by base effects) improving exports are helpful. Such was not part of the story last year and it helps fill the gap from anaemic domestic consumption. But what’s more important is the current focus on collateral, property and equities. Fixing them will fix a lot of things, not least consumption (via wealth effects). In terms of property it’s noteworthy, I believe, that in Premier Li’s address he omits any reference to "housing is for living in, not speculation". That’s a change in story. One suggesting they are no longer trying to break the property market. Maybe even fix it? More relevant, in terms of immediacy, is the policy focus on stock-markets. Their latest measure, aimed at SoEs, attempts to get them to increase dividends with punitive measures for those who don’t. If that sounds familiar, trust your instincts. It’s taken straight out of the Japanese playbook ‘with Chinese characteristics’. At the very least, it’s hard to see where the incremental negatives are coming from, short term, to justify further selling. Of course, we may have issues to deal with later in the year, like a new incoming US President or a more hawkish old one. But for now at least, Chinese stocks are looking more and more like becoming something of a ‘renters market’.

New stories about to be told in gold

Gold is my favourite story currently. I’ve always loved talking about supply constrained real assets, for price reaction can be explosive when the demand story changes, and you can look like a hero. Take anything where there’s a known structural supply shortage – public infrastructure, GPUs, GLP-1s, bitcoin, cocoa, sugar, uranium, US treasuries (sorry, wrong post), US housing or builders – and see what happens to price (and proxies thereof) when a demand story emerges. Throw it in an acronym or index and things can get quite wild! I expect similar pictures to emerge over time in UK stocks (think disappearing free-floats), in copper, precious metals like silver. And in gold. What’s cool about gold is we can use a story that works. At least it has for bitcoin. Several weeks ago we discussed the prospect of the World Gold Council (WGC) creating a digital ledger, from which it will issue tokens – backed by physical gold. We suggested this could replace the world’s newest currency, bitcoin, with its oldest: gold. What’s more, digital gold could shift gold from being solely a protective asset to an appreciable one, opening up an enormous TAM in the process (i.e. anyone under the age of 40). Before this can happen, the WGC needs to convince the gold ecosystem of the idea, and agree certain standards and protocols. This has always been the issue with DLT, for it bumps into competing self-interest. But here’s the thing. The beauty of these digital networks are they are virtuous. It’s easy to gain consensus if everyone wins. And here, in digital gold, I think they do. What a story that could be.

A golden incentive

Metcalf’s law describes the value of a network being proportional to the number of its users. And so, the more users or nodes you can attract to a network, the greater its worth. As in the case of bitcoin, when the incentive to promote/add users is profit, network effects can be powerful. Now, returning to gold. What’s the one thing all the network participants would benefit from? Answer = a higher gold price. None least the central banks of those countries who suffer from large structural deficits. As discussed, one way to fix a debt problem is by increasing the value of its security or its counter-ledger, equity. If gold was to go digital and attract a wider, younger audience all heavily incentivized to expand the network, what could happen to price? (see above: constrained supply). Just imagine: if digital gold performed like bitcoin recently and let’s say tripled, that could eliminate the deficits of most G7 governments and turn some, like Italy, into surplus. Now that’s a golden incentive like no other. Midas meets Musk?

Sourced from: https://www.visualcapitalist.com/cp/largest-gold-reserves-by-country/

Disagree and commit

I’m simply staggered by some of the industry’s response to the announcement of the British ISA. The CEO of a large investment platform suggested it was "ill-conceived, politically motivated….and will have no impact whatsoever”. But I strongly disagree. This is good news. Why? Because anything that helps remove equity supply – and this does – will have a powerful impact when demand returns. Which it will. Eventually. ?Folks would do better using their time, and platform, to get behind it or even promote the positive benefits of compounding tax-free savings or dollar-cost averaging. Munger would have. Of course it’s not perfect. And yes, I’m slightly miffed they didn’t include stamp-tax relief, but this is a step in the right direction. It’s the start of new story, one we all need to get behind. Even if you don’t agree with it. We should disagree and commit. An idea that worked out quite well for the guy that famously suggested it: the world’s richest man. Jeff Bezos.

New narrative, new acronym

Merryn Somerset Webb offers the most hopeful read within the context of an overwhelmingly negative press. And here’s my own alternative narrative to this otherwise gloomy summation. I think this is the start of something very special for UK growth assets. Anything, however small, that helps stem and possibly reverse the direction of outflows, could be an enormous catalyst for UK markets. Why? Because price is made at the margin. And the marginal buyer here is the 2nd largest pot of savings outside the US. Last year was the worst year on record for outflows from UK funds. Yet, the FTSE rose 13% in USD, incl. dividends. Not bad: why? Because UK corporates are buying back their shares at a rate seldom seen anywhere, in history. Them and private equity it seems (see the share prices of Wincanton, Spirent and Curry’s for clues). My bet: UK pensions have little left to sell in terms of UK stocks (Somerset-Webb suggests UK allocations of less than 3%). But it’s hard to know what they own. At least it was. The government now want them to disclose their holdings, which I think is a big deal. Why? Because it could become uncomfortable and possibly untenable for good-willing trustees to justify providing capital for other people’s benefit, at the detriment of our own families, communities and businesses. The Australians, which the government is clearly looking at for better practice (and have little aversion to buying UK assets it seems), typically hold anywhere between 10-25% of their assets in domestic shares. Not a hard target of course, but anchoring is a powerful tool. Just ask Robert Cialdini who wrote a book on the subject. Looking for a catalyst? I don’t think it will be the NatWest sale. Although that could help. Especially if the share price goes up. A lot. But the much bigger catalyst could be in the form of the Shein IPO, that is if the LSE can attract that listing away from the US. That and some education, about the benefit of owning UK shares, not just to shareholders but to wider stakeholders. Even pensioners. The UK just needs a new story. A new narrative. And then the numbers will follow. It could probably use a new acronym too.

Feel free to send your ideas.

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