Quarterly Commentary Q1 2023

Quarterly Commentary Q1 2023

Nigel Lawson, who died on 3 April, wrote inter alia one very long book and one very short book. His memoirs, more than 1100 pages, are among the very best political memoirs. His book on climate, An Appeal to Reason, was much criticised for saying something that it did not say (his Economist obituary claims that he argued ‘against the reality of man-made climate change’). He was not a climate change denier, on the contrary acknowledging in the very first pages of the book the human element in global warming. As a finance minister he is still revered. He was the great simplifier, equalising capital gains tax and income tax and getting rid of several higher rates of tax. His successors, both Conservative and Labour, have produced ever more complication. A pivotal moment was the decision by Gordon Brown as Chancellor to recoil from his plan to tax private equity performance fees as income rather than capital gains, instead introducing more complexity in capital gains treatment and distancing it further from income treatment.

There has been insufficient attention as to whether the privileged position of private equity is a good thing. Given the difference in tax treatment of interest and dividends, it is no surprise that, absolved from public market scrutiny, private equity piles on debt; nor that, with its short-term horizons, it minimises capital investment and concentrates on maximising distributions to investors, increasing the risk of the whole enterprise and reducing the benefit to society. The appalling behaviour of Southern Water, the worst of the water companies which pour sewage into the sea after years of inadequate investment in plant, is an egregious example of the results of such incentives. We are as fond of public markets as we have always been, for it is in public markets that the best balance of market disciplines and the interests of investors is to be found.

The UK equity market has not done much good for investor interests since the global financial crisis, at least by comparison with other markets, especially the US. Brexit and political febrility and self-absorption have been damaging. These factors are reflected in forecasts. The IMF expects the UK to have one of the lowest rates of growth of any country in G20. Maybe, but all forecasts are suspect. The egg on the face of the Bank of England, which only a few months ago predicted five consecutive quarters of negative GDP growth and which has now moderated its pessimism, has hardly been noticed. The other side of the coin of recent troubles, including poor performance in terms of productivity, is that there are abnormally low valuations which we continue to feel provide significant opportunities.

Robin Lane-Fox has written about gardening in the Financial Times nearly every week for 50 years. Christopher Lloyd’s gardening column appeared in Country Life every week for 42 years to 2005, a year before his death. The first of these OP quarterlies was in 2005. Messrs Lane-Fox and Lloyd always managed to find something new to say. There must perhaps have been a bit of repetition - plant bulbs, prune the roses. We, in the 70 quarterlies since we started, have been more repetitive, hammering away on two particular themes: have faith in equities, and valuation matters. In this last quarterly by the current author, we would bash on about the same two themes. Equities provide the best hope of a decent after-inflation return for the long-term investor; and if the investor is sufficiently patient low valuations lead to high returns and high valuations lead to low returns.

These have been the mantras of OP over the years since the global portfolios which we manage started life (before OP itself) in 1997. Circumstances change. New risks appear, and there are new fields of endeavour to explore, but the eternal truths apply, we feel, as much to the new as to the old fields. Another eternal truth is that the world is full of uncertainty, even though the nature of those uncertainties changes. We now face the perils of high levels of government debt, the shift in geopolitical power bases and alliances, the impact of artificial intelligence, and climate change. The insights and the issues change but the tools and the process to identify them and deal with them remain constant. Plus ca change, plus c’est la meme chose.

Oldfield Partners

April 2023

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