Mind-expanding links and reading for the weekend

1. Crazy Democrats
2. Energy prices
3. BlackRock’s surprises for 2022
4. What you should have invested in 2009
5. Rolls Royce
6. Factor Olympics

Do people really think this!

A couple of days ago Tyler Cowen’s excellent blog featured some alarming polling research. It’s based a Rasmussen poll and purports to show that Democrat voters are every bit as authoritarian as the supposed authoritarian right. Here’s the MR quote –

– “Fifty-nine percent (59%) of Democratic voters would favor a government policy requiring that citizens remain confined to their homes at all times, except for emergencies, if they refuse to get a COVID-19 vaccine. Such a proposal is opposed by 61% of all likely voters, including 79% of Republicans and 71% of unaffiliated voters.

– Nearly half (48%) of Democratic voters think federal and state governments should be able to fine or imprison individuals who publicly question the efficacy of the existing COVID-19 vaccines on social media, television, radio, or in online or digital publications. Only 27% of all voters – including just 14% of Republicans and 18% of unaffiliated voters – favor criminal punishment of vaccine critics.

– Forty-five percent (45%) of Democrats would favor governments requiring citizens to temporarily live in designated facilities or locations if they refuse to get a COVID-19 vaccine. Such a policy would be opposed by a strong majority (71%) of all voters, with 78% of Republicans and 64% of unaffiliated voters saying they would Strongly Oppose putting the unvaccinated in “designated facilities.”

Crikey. Really.

As a center-left liberal, I’ve found myself becoming increasingly horrified by the guff that people from my side of the fence believe in. Take the Welsh government. Its leader is perfectly affable, but the draconian policies enacted for Covid have, from what I see, achieved almost nothing different from those policies pursued by the supposedly evil Tory UK regime. Ditto Scotland. It strikes me that when pushed, fans of the Welsh administration say that in fact a) they prefer the calm, thought-through leadership of the admin, and b) they like tougher rules because it makes them feel safer.

But the evidence says that it doesn’t actually make them safer. It just gives that warm, fuzzy feeling. Which isn’t good enough grounds for policymaking. It’s like the argument that pushing back boats full of refugees will make Brits feel safer, but it won’t actually do anything to stop the refugees. And besides, no professionals are willing to actually do it.

It is the politics of the theatre. We accuse everyone from social media to pop stars of overreaction and melodrama, but in truth, our political masters engage in the exact same activity.

Outlook for energy prices

One of the peculiarities of the last few years is that we’ve seen a decline in the number of actively managed funds focused on the energy space, despite rising prices. I suspect there’s an element of ‘do-goodery’ going on – one doesn’t one to be seen still investing in legacy assets which may end u being stranded. I’ve always found this odd. One can accept that we are heading towards net zero – or just much lower carbon emissions – whilst still recognizing that oil and gas will be pumped out of the ground by profitable businesses. Given that most investors seem to think the long term amounts to a year or two, I think we can safely say that energy businesses have a long-term future over the next ten years. Beyond that point, all bets are off but ten years is a long time in investing !

Anyway, back to energy funds. One of the survivors in this space is UK-based asset manager Guinness which has a highly regarded actively managed fund. Last week they brought out their outlook for 2022. Bar rivals such as Westbeck I can’t think of anyone who I’d rather listen to than the Guinness team. They, afterall, spend all their time researching and talking to listed energy companies. You can read a longer version HERE but here’s my top line summary. On the macro, big picture side:

• The path for oil demand will vary region by region, as developed markets plus China continue their strong vaccination roll-out, whilst other emerging countries remain more exposed to COVID. Overall, the IEA forecast demand in 2022 of 99.5m b/day, up by 3.3m b/day versus 2021. This would put global oil demand on par with its previous peak in 2019, and on course to reach a new high in 2023.
• OPEC+ will maintain high compliance with quotas
• moderate growth from US shale production, with average production rising 0.5m-0.75m b/day versus 2021.
• For natural gas, relief from very high prices should be forthcoming. Additional supply will come from Russia and Norway; China is increasing its coal supply, and with normalized weather, hydro and wind generation will pick up again. Prices should settle back around $7-9/mcf, well down on current levels, but a significant step up on 2019/20.

Crucially in terms of equities Guinness – like me – think that energy equities are still cheap:

• Despite the 2021 rally, energy equity valuations remain subdued. The MSCI World Energy Index now trades on a price to book ratio of 1.6x, versus the S&P500 at 4.9x. The relative P/B of energy vs the S&P500 remains close to a 55-year low.
• Assuming a $65/bl Brent oil price, we forecast a free cash flow yield for our portfolio in 2022 of around 9%. We believe energy equities currently discount an oil price of around $55/bl. Adopting $65/bl Brent as a long-term oil price (consistent with the bottom end of OPEC’s desired range), we see 30-40% upside across the energy complex.

BlackRock Wealth on the surprises of 2022

Private equity business Blackstone a few weeks ago brought out their list of ten possible surprises for 2022. You can read the whole list here but I’d highlight the following comments from Byron R. Wien and Joe Zidle.

Apparently, this is the 37th year Byron has given his views 0- he defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening. Here are my highlighted surprises…

• The combination of strong earnings clashes with rising interest rates, resulting in the S&P 500 making no progress in 2022. Value outperforms growth. High volatility continues and there is a correction that approaches but does not exceed, 20%.
• The Fed completes its tapering and raises rates four times in 2022.
• The price of gold rallies by 20% to a new record high.
• The price of West Texas crude confounds forward curves and analyst forecasts when it rises above $100 per barrel.
• Suddenly, the nuclear alternative for power generation enters the arena.
• the United States finds it cannot buy enough lithium batteries to power the electric vehicles planned for production. China controls the lithium market, as well as the markets for the cobalt and nickel used in making the transmission rods, and it opts to reserve most of the supply of these commodities for domestic use. Market volatility in 2009

Which markets should you have invested in in 2009

Two great graphics below which show investment returns from various stock markets in 2009. They’re from the Global Economy website. The countries with the most damage are the ones you’d expect plus a few frontier basket cases like Venezuela.

What about the bottom 20 countries? Cue the second part of the chart below. Botswana wins the prize followed by Panama and Mauritius. In terms of ‘major countries, there’s no one in the bottom 20 except if you include New Zealand (9.02) and Malaysia (7.72). By comparison, the US was 11.02 and the UK 13.20.

Good overview of Rolls Royce

Regulars will know that I’m a big fan of the website Sharepad. It’s a great tool and they also have some fab articles – a few even from me!! If you’re interested in an elegant and concise summary of why shares in UK engineering giant Rolls Royce might be worth a look, read this excellent article on the Derby giant.

Factor Olympics

London-based investment analyst Nicholas Rabener produces some of the best research in the business courtesy of his FactorResearch website. He’s especially good on long-term data supporting – or disproving the case for factor investing i.e using quantitative screens to identify everything from value stocks to momentum memes. A particular highlight is his end of the year Factor Olympics which shows which factors have performed best.

The table below shows the long-short factor performance for the last 10 years ranked top to bottom. The global series is comprised of all developed markets in Asia, Europe, and the US. The good news is that most factors outperformed (using a long/short strategy) with value at the top while Momentum and Size underperformed.

The bad news is that those returns are based on a long/short strategy. If you highlight returns from actual US-based smart beta ETFs, the story is very different.

“The performance of the Value, Size, and Momentum factors were directionally the same in long-only and long-short factor investing in 2021. However, the trends were different for Quality and Low Volatility factors as these generated positive excess returns in long-short and negative excess returns in long-only portfolios. Although the short side of factors has been criticized in recent years, it can contribute value.”

Put simply, why bother with factor ETFs?