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Dismal Days

2 November 2020

So many things for the market to worry about. It is currently in one of those phases during which, even when presented with good news, it worries about the bad news that might follow. Faced with the sunny, bright uplands it searches for the heavy rain clouds over the hills.

On the Brexit front there now seems every likelihood that an agreement will be reached. In these dire times when even the German economy is in lockdown, is the EU really in a position to walk away from an annual trade surplus with the UK of approaching €100bn? I think not. This is one area of uncertainty that is going to be cleared one way or the other within a few weeks and I feel the signs are finally pointing to a favourable outcome.

Then we have the US presidential election which reaches its climax tomorrow. Biden’s lead appears to be narrowing but a few swing states such as Minnesota and Wisconsin could change things dramatically. Trump confounded the polls last time – can he do it twice? It seems a big ask at this point but last week’s tremendous GDP numbers will have helped. Again, though, the result, as long as it isn’t contested, will remove another area of uncertainty. A Trump win would, in all likelihood, trigger a strong equity market rally but even a Biden win would almost certainly be followed by a massive economic stimulus in the face of Covid. The market has, I feel, gotten used to the thought of Biden in the White House so any disappointment could pass quickly.

That leaves the ongoing Covid problem. Boris has clearly been trying to avoid the full lockdown that has befallen Germany and France and the emergency measures imposed in Spain and something close to that in Italy. His three-tier strategy was designed to keep as much of the economy open as possible, with some areas ascending the ladder as others declined. But over the weekend he has bowed to the pressures applied by SAGE despite widespread claims from the scientific establishment that their model is wrong. Wrong or not Boris has gone with it and we are back where we were six months ago.

It all seems very depressing at the moment but the sun will shine again. When it does we might expect the UK equity discount to the other majors, about which I have written several times, to start to narrow. This might be aided by some dividend restoration – the Bank of England has indicated that bank dividends were not cancelled but deferred. That would certainly help the heavily finance-weighted FTSE 100 Index and we shouldn’t lose sight of the big predator sharks across the pond either – they are clearly circling. A “V” shaped recovery has given way over recent months to something more diluted but the second wave and lockdown might now indicate a “W” and, if so, the real recovery could be far stronger. Next year, hopefully blessed with a vaccine, might not be so bad after all.

Hornby – Update

My little speculative tip for the year back in January has spent the last ten months doing very little, stuck for much of it in the mid 30’s where they raised some funds via a placing mid-year. I suggested in January that, following eight years of losses, new CEO, Lyndon Davies had every chance of achieving break-even in the first half of 2020/21. Well, the first half figures reported last week showed that he did even better than that with a small pre-tax profit being achieved. I grant you it was only £17,000 but that represented a big turnaround from the £2.7m loss during the equivalent period last year.

Rationalising the product range, introducing new lines and incentivising the workforce has made a vast difference, as has banging a few boardroom heads together. Covid has, in actual fact, been a bit of a bonus to Hornby, with stuck-at-home lockdown victims resorting to some nostalgic model making. The new ranges aimed at the dedicated adult modeller could not have been introduced at a better time.

Mr Davies’ ideas are now beginning to draw attention from investors, as witnessed by the sharp share price rise to 45p (tipped at 38p) since the figures were published on Thursday. His next trick must be to retain the interest of those new customers and ensure it doesn’t disappear alongside Covid. He’s made a very good start though!

Russell Dobbs FCSI

Chartered Wealth Manager