Note from the Investment Floor - ‘Leverage, Momentum and Narrative’
Ned Naylor-Leyland explains the important of leverage, momentum and narrative to modern markets, and asks whether we’re at the end of a monetary supercycle.
‘Leverage, Momentum and Narrative’ for gold and silver
Guidance from the Federal Reserve has been pretty consistent since the pandemic began, said Ned Naylor-Leyland, Head of Gold & Silver, while the bond markets reaction to that guidance has swung from overly dovish to overly hawkish, in his view.
For so long it has been the direction of rates that has dominated the conversation, and now it’s the direction of inflation, noted Ned, pointing out that we’re getting very strong food price inflation and in the past that has correlated quite closely to the prices of gold and silver. Generalist investors tend to think of gold as an inflation hedge, he said.
In Ned’s view, gold has temporarily lost the three things that are needed for good performance in modern markets, which he calls “LMN”: Leverage, Momentum and Narrative. That’s potentially good news for those thinking of increasing their allocation to gold! Silver, interestingly, has fared materially better than gold of late because, despite losing some momentum, it still carries a narrative (it is used in solar panels, batteries, a variety of electronics, and as an antimicrobial element in medicine) and that has helped support silver. There has been a big decoupling in the performance of underlying equities in the monetary metals space, between those have done well over the past six months and those that have been hit due to little more than the unwinding of positions from index holders.
Finally, Ned touched on the concept of a “commodity supercycle” which has been doing the rounds for years. In his view, the way that commodities are behaving implies a supercycle, but to him it feels more like a monetary supercycle, which could be coming to an end with implications for all asset classes. How Ned has sought to take advantage of that over the past few months is through buying high quality index constituent stocks that have fallen substantially for no good reason. In his view, once there is a tilt in real rates then the monetary metals market should get “LMN” back, which makes him feel optimistic for the future.
Let equities be equitable
Richard Buxton, Head of Strategy, UK Alpha, said he is opposed to diluting rules in the City of London for companies that are planning initial public offerings (IPOs). In particular, he does not think it is a good idea to allow dual classes of shares where owners or directors of companies have more voting rights than other investors.
Richard’s comments came in response to the Hill Review’s recent recommendations that stock exchange rules be relaxed in order to attract more IPOs of innovative companies in London, so to better compete with other financial capitals such as New York, Hong Kong and Amsterdam.
A fundamental principal of investing is that equities should be equitable and that if you are providing capital to a company you should have a right to vote on how that capital is invested – one share, one vote, Richard said. Dual share classes have often been used to protect poorly run, family-controlled companies, but over time the structure thankfully has become rare, he said.
The Hill Review listing recommendations risk reverting to ‘the bad old days’, which would be a massive retrograde step, in his view. Current rules for standard listings on the stock exchange afford protections to founder-managers, so there is no reason to allow premium listing rules to be diluted and to weaken standards of investor protection by allowing dual-class voting structures, he said.
If companies want to list their shares based on excessive valuations, it is better they do so somewhere other than the City of London, said Richard.
Please note
Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
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