Today marks our inaugural Honey AMA. Honey readers that refer five friends to the newsletter can ask questions and we endeavour to answer them. So if you'd like to ask a question, remember to sign up to Honey if you haven't and refer any friends that want to learn about the goings on of the financial markets.
You can watch a video of us answering the questions below or read the transcript.
David Kimberley: Hello and welcome to our first Honey markets AMA. If you haven't signed up to Honey for our daily take on the markets, be sure to do so through the link below.
Now, the long awaited reopening trade put a spring in the step of UK shares, pretty much since the end of January. But July has been a different beast, and that optimism has crumbled quite a bit over the past few weeks. We're here to answer your questions on all of that and more. And remember to get your questions at the front of the queue, keep referring your market-loving friends to Honey. It’s five referrals, remember, and you get to ask us whatever question you like as long as it's related to the markets.
So, my name is David Kimberley and I'm part of the editorial team here at Freetrade. I'm joined by Dan Lane, our senior analyst, who's going to be helping me answer your questions.
To get started, we have a question from Freddie and Freddie asks, Freedom Day, there were big market falls on both sides of the Atlantic. How much should we read into that? So Dan, how much should we read into that?
Dan Lane: Yeah, you know, it's a really good question. You know, we all thought that market the markets would explode really whenever the economy got back to pumping. But a lot of the time in markets traveling is better than arriving. The journey kind of is a little bit more exciting, breeds a little bit more momentum than the actual destination. That might be what's happening here, and especially now that, you know, these Delta variant fears have come back into play. You know, we've all been excited. We're getting into the pubs. A lot of us who've not really enjoyed wearing masks can have a little bit more of a lenient attitude to that. But there is this variant that's giving people a little bit of trepidation about going out there again.
But it's also a fear for the economy. A lot of the companies that have been waiting to reopen are a little bit scared as well, because what if they open and then have to close immediately? On the other side of that, there's a completely different thing we have to worry about — inflation. We've been hearing a lot that inflation is transitory. That seems to be the word on everybody's lips. Most of all, the Fed and inflation sitting at 5.2% in the in the US, 2.5 percent in the U.K. Now, that's OK. I guess the markets aren't going to react too heavily to that if it is transitory and if it is fleeting.
But given that it's coming around, there's a few readings coming, one after the other that are [show] it's looking to stay around a little bit, it seems to be less transitory than first thought. You know, high inflation could provoke a rise in interest rates. And that's really what we're seeing happening there in the US, where the US tech high flyers….people are feeling they're a little bit more on shaky ground. One thing that's happening is that some investors are moving to the UK because, coming into July, the UK has the lowest valuation amongst major global markets. It was trading on something like 13 times earnings. The US was like twenty three. So very cheap. The UK was very cheap. Doesn't necessarily signal great value, just means it's cheap. All UK investors really wanted us to have a tech high flyer during the pandemic and we didn't really have it. Now, [the tech sector] looks a little bit vulnerable and people are starting to think, “oh, it's not too bad.” We have legacy sectors that might look attractive amidst like an economic reopening or a higher inflation world.
David Kimberley: Yeah, I think there's some good points there. And one of the things I've been banging the drum about a lot over the past 18 months is that there's so much hype, I think ,in certain sectors, particularly in the US, you have the green energy, tech and renewables of some description, electric vehicles, all that kind of stuff.
And I think that's maybe made people forget there's still lots of good companies that do slightly boring things. So if you look in the U.K., I mentioned in this week's Honey, Schroder's and Barratt Developments. So, you know, financial services and a homebuilding business, not the most exciting in the world, but they've performed perfectly well over the past couple of years.
That's not to say everyone should rush in and start buying them. But just to make you think that not all investing has to be some kind of novel technology or something that's going to be really groundbreaking. There's still lots of great companies that do this sort of more mundane, day to day things that we use in our daily lives. So anyway, we can move on to the next question, which is from Callum, which is a slightly different one, asking us, what's a good way to invest in commodities? So slightly different one there.
Dan Lane: Yeah, a different one, but probably brought on by the speed of inflation. You know, these raw materials companies can raise their prices in line with inflation. That's what that's what a lot of the textbooks tell us. Yeah. You know, it's probably good to say, you mentioned a couple of companies just there, that this isn't a stock pitching session. This is just going over what the market's telling us and maybe a little bit of an outlook, but none of it is financial advice. And we don't advise and we just love talking about the markets and love going over them. So if anyone's unsure about their financial situation, speak to an advisor.
Yeah. What we are just talking about just to wrap up. So it's not an inducement to buy or sell anything. I think I filled the compliance box there.
But in terms of commodities themselves, you've really got got a gamut here. And they've been out of favor for a little while. We saw them come back in 2020 at the end of Q4 with gold and actually gold hit a record high last year. So people are starting to switch back to them. They kind of went out of vogue again because gold came back. But what are the options?
OK, well, we've got the commodities themselves so you can buy your gold or silver, your palladium nickel, your lithium. You can buy all of these things. If you have a nice little vault at home, you could trundle home with a gold bar and put it in there. Or if you don't fancy doing that, you've got these ETFs that track like the spot prices. You've even got ETFs that have baskets of commodities. So things like CoreCommodity. And that's one of the ETFs on Freetrade. So that's just an easy way into the sector. If you need to have some commodity exposure, then you've got things like investment trusts like BlackRock, World Mining. So they will go in and pick kind of miners, these commodity miners and buy the actual company shares themselves. One of the positives of that structure is that sometimes they go for commodity stocks who fund mines but don't actually own the mine. But then what they do is they get a royalty stream from any profits that that mine makes. It's a bit like music royalties, but instead of getting a chart topping hits, you're maybe getting gold out of the ground.
So that's just one thing that sometimes investment trusts target as well as well as diversification. You're still in the mining sector, but the diversification probably comes from different different stages of development within these miners. Some are mature, some are young. And so, yeah, it's not the same diversification you're going to get with kind of a broad market ETF.
And then one that I'm hesitant to add because it does carry a little bit more risk are these AIM miners. So you kind of get these junior miners on the UK's junior market. They get the work from a small base. They have fixed costs, but once they cover those fixed costs, everything else turns into profit. So if you're getting a commodity out of the ground and you cover your costs, you know that everything else is profit. And if you're a small operation, that can mean quite a bit. But with that comes the the possibility that these explorers or miners never actually find the asset or spend so long finding the asset that it eats into the capital of the company and they garner this really unfriendly name.
There's lifestyle companies and these are companies who kind of continually dilute the share price, continuously, raise capital to pay salaries and pay groundmen for these mines. And then they never actually make it. So there's a huge amount of risk there, but they're just some of the ways you can really get into commodities.
David Kimberley: OK, I think you've done quite a comprehensive job there, so I won't add anything to what you said and we'll move on to the next question, which I think is very pertinent to you, because, if anyone watching is unaware, Dan appears most weeks on the Vox Markets podcast with Justin Waite. He’s Freetrade’s representative there to talk about UK small caps. That's, you know, smaller stocks trading on the UK markets. And we have a question from Sabria, which is, what's the outlook for UK small caps?
Dan Lane: I mean, good question. And, you know, there's such a wide range of small caps. It's hard to say what is the outlook, I guess. I mean, where do we start?
OK, well, if we look at the huge international companies that are listed in London, you know, around 75 percent of their revenue streams actually comes from abroad. These are truly international businesses. Move on to the next 250, it's closer to 50/50. It's not quite. But it's you know, it's maybe 50 percent revenues from abroad, 50 percent from at home.
You actually wrote a great piece on this and the divide and how you can kind of think about the domestic economy and who's being represented there. So as you go down the cap scale, you get closer and closer to serving the domestic economy. Kind of makes sense if you think about it, because smaller companies don't have a global reach, they're more likely to serve their immediate community.
And, you know, that's where it is on AIM and in the small caps. What you then say is, “OK, well, if they're serving the domestic economy, they're probably more tied to the fates of what the UK is going to do as an economy and how it comes out of this pandemic.”
So if we look at the OECD figures, they're saying that the UK economy is forecast to grow by just over seven percent — 7.2% — in 2020. That would give it the fastest growth in 80 years. We have to accept that that's on the back of a particularly awful year, so pinch of salt and everything, but relatively speaking, I'm just looking at some figures here. The US is due to grow at 6.9%, the Eurozone, 4.3%. So it's not nailed on. But given the opportunity set for the domestic economy to grow as we all get back up and support it, the firms directly tied to the domestic economy, or more tied to it, it could be quite an exciting time for small caps.
But yeah, that's not to say that it's a sure thing. Small caps can have wildly different markets and influences and bank balance sheets. We recently did a piece on AIM and how to really get into AIM and not get your fingers burnt. Looking at their levels of debt after the past year , which has been very hard to survive, that's going to be hugely important for all investors and small caps.
David Kimberley: Yeah, I mean, I suppose one point I'd add to that, which is another word of caution, which is I think that a lot of the time when you talk about a particular macro trend being positive for company X, it seems like people then rush into buying any company that might stand to benefit from it and then ignore the nuances of that individual company. So even if the economy does improve in the UK, that's not to say that just because you're serving the UK economy that you're going to do well. So be sure to make sure that it's actually a good company and not a rubbish one, because the macro trends don't guarantee that you're going to benefit from them.
And the next question is away from the UK and talking about China. So Louis asks, has China pretty much killed off crypto or killed off the crypto rally?
Dan Lane: Well, short and sweet from Louis. Thanks for that. And just before we start to do something that maybe six, five, six years ago we would never have talked about giving air to it as a proper asset. And what we're having to do now you know, it's something that's grown so much and there's so much money in it now that we have to kind of look at it.
That said, it's still a fledgling area of the market. It's still a fledgling sector. Anyone who tells me that they know anything about the valuations of these things, I mean, I'm just going to have to defer to them or else, you know, ask them to explain a little bit more to me, because I just don't think that you can properly value these as assets. That doesn't mean crypto is useless. It doesn't mean that, you know, ultimately this is the last we'll see of any any type of Bitcoin variant or altcoin or anything. What recent events have shown us is that they aren't untouchable. You know, Bitcoin and all its peers were meant to be kind of this decentralized currency that was just meant to be the alternative to getting stuck with the Federal Reserve or Bank of England, Bank of Japan. Anything that wasn't meant to be affected by any of these central banks. What we've seen is that that's not true because China has really clamped down on it. I saw seen videos and videos about all these mining machines being destroyed. I actually saw one in Malaysia by the steamrollers going over mining machines.
It's not the end of crypto. I think Bitcoin is on shaky ground and because Bitcoin is the poster child of it all, this is what's bringing the crypto market down. Whether Bitcoin will be the poster child for crypto in five years, I don't know. But what we're seeing is a lot of use cases spring up with other coins and other variants of crypto. So if I look at just an example here would be Telcoin, which has plans to be a competitor to Western Union as a remittance service. Now it plans to take full advantage of a banking license. It's a compliance first operation.
They want to get on the regulators’ good side. This feels very, very different from the crypto five, six years ago, which was very much a, you know, pretty much a two fingers up to the establishment. We're not going to play by the rules. We want to create our own currencies here. What we're saying now is a little bit more of a maturity to the market. And so sorry, a bit of a long winded answer. Maybe Bitcoin is on shaky ground. I don't think crypto is. And that's maybe where I'll leave that before I get in trouble.
David Kimberley: Yeah, I mean, I've had I would add a couple of things, the first is that I think people for a long time, people haven't really figured out exactly what they want Bitcoin to be. And for a lot of people, it seems to just be this YOLO speculative thing where they think they can get rich quick from it. And then for other people, it's just supposed to be some kind of hedge against inflation. Then for others, it's supposed to be an actual currency.
I think on the latter point, it's really hard to find a good example of it being used as a currency just because it's really hard to price. If you imagine if you're a landlord and you're getting paid in Bitcoin, you can't guarantee that next month it won't be worth half what it is the previous month.
And I think also for inflation, I wrote about this a while ago — and got some hate mail, ,unsurprisingly, in response — saying that Bitcoin may not actually be a great hedge against inflation. And I think people are using the fact that it has risen more than inflation has with it being tied to inflation. The two don't really seem to match up. I mean, Bitcoin has fallen in years when inflation has risen and has risen exponentially more than inflation has risen at other times. So that's something I would be careful of. And I would just say I'd be careful of the sector in general.
Dan Lane: Yea, just because just because an asset rises at the same time as inflation doesn't mean that it's a hedge necessarily. And the fact is that crypto just hasn't been around long enough for us to draw clear conclusions. We could slip into confirmation bias and just look for what we want to see and look for the characteristics that we want it to have. That's just not prudent. You know, we have to be a little bit more mature. It might be there. It might not. But we have to give it time.
David Kimberley: Yeah, I think that's a good idea. So the last question you've got this week is from Francesca who asks, I've got an ISA and a pension with Freetrade. Should I treat them differently in terms of the assets I put in them?
Dan Lane: Well, she gets extra points for having a SIPP with Freetrade. I would say, look, this is you know, I like this question, actually. It's coming away from assets. And this is more about financial well-being, isn't it? And using your tax efficient accounts properly.
Listen, whether you have an ISA or SIPP — they're just the wrappers. OK, if you've never heard them being described as wrappers, it's because you decide what goes in them. And it's not just there for you, filled with investment products.
So take a step away from the market for a second. Think about your goals. Think about your time horizon, think about your attitude to risk, and then let that inform the assets. And you won't go wrong in terms of what you pick, you know, the suitability of the asset. I'm not saying about performance. Obviously, that can vary. But, you know, there's there's a range of assets that you would say maybe would be more suitable for low risk or medium or high risk investors. But, you know, if we start with this kind of triumvirate or this triangle of goals, horizon, and risk, if you look at your SIPP, you'll naturally have a longer time horizon.
Hopefully, you know, you can access your SIPP from fifty five. It's going to rise to the age of fifty seven. I'm not sure what age Francesca is, but that might be a longer term investment than an ISA. And we tend to find that that allows you to take a little bit higher risk because the trajectory of that is more likely to smooth out over the long term.
I always think about, you know, looking at Earth from space or looking at a golf ball looks quite rigid or bumpy up front. But, you know, take yourself away from it, and it starts to look a lot smoother. But that doesn't mean that the assets that you take should be just a punt. The risk in that sense doesn't just mean buy the next hot stock and leave it for 50 years, that's not what that means. It means that you should allow yourself to feel less pressurised during the volatility in that period. Equities carry a higher risk naturally than the likes of bonds. So you might feel more comfortable adopting equity risk over the long term because it's more likely to level out and give you the opportunity to beat cash over the long term.
Think about ISAs then the opposite way — they're more likely to be shorter term. We always say five years minimum is a good way to invest. But people will often use things like ISAs to hit things, you know, things like house deposits, and that brings in a different element. In the shorter term, there is a growth element to that. You want to get as much money as you can to pay for that deposit. But then there's also a conservation element as you get closer to paying for it. And that might mean taking some risk off the table and mixing your assets, maybe equity heavy to reducing that equity exposure the closer you get to your goals. And that might mean more fixed income products. That might mean a slightly higher percentage in cash. It might mean going from a growth heavy equity to maybe something like equity income. We actually have a lot of that on Freetrade website on the Invest Hub and the news hub. So there we go Francesca. I would say it's a fantastic question. Definitely look into your asset mix there and have a look on the Freetrade site as well.
David Kimberley: Great. Well, I think that's, again, another comprehensive answer that I won’t add anything to. It's also our last question for the week.
So just a reminder to refer your friends to Honey if you want to ask a question. Five referrals gets you on to the AMA list, and we'll do these fairly regularly to make sure we are answering all of those questions. And I will say goodbye from me and thanks Dan for answering these questions so well.
Dan Lane: Thank you very much. It was really fun. Yeah, let's do it again.
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