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Josh Mahony from IG sums up the forces driving markets and currencies Watch here

Leading commentator Josh Mahony from IG - are we seeing a US$ revaluation?

Member Info for steph

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Member Since: Wed, 6th Aug 2008

Number of Share Chat Posts (all time): 4,058
Number of Share Chat Posts (last 30 days): 15

Last Posted: 12 Aug '17

Post Distribution over the last 30 days

2 Jul '17

We have a lot of political uncertainty about but we also have a very very dovish central bank with regards to interest rates -the most important factor in sustaining HP at current levels and even some room for further moderate HP inflation above general CPI.

I can't see central bank interest rates rising to levels considered "unhelpful" -say 4% - for the foreseeable future. That just won't happen until Western Nations pay down government debt to something much lower than now. Until then they can't afford to and as most central bank rates are set politically in one transmission mechanism or another it won't happened. Turkeys don't vote for Christmas.

Indeed I think 2% is the new normal (and even that not for a few years now) but new bank mortgage lending assumes that 4% is coming back and has throttled back approvals accordingly since 2009. Sub 2% is positively stimulating although not critical. No bank assumes sub 4% will last when checking affordability (especially for buy to lets) so sub 2% is not the fulcrum point.

We have had 8 years of much tighter lending criteria for new purchase as well as re-mortgages. Nearly all the market has renewed mortgages under the new tighter lending criteria and HP inflation has meant that any negative equity as a hang over form the looser criteria pre 2008 is now firmly eliminated. Baring a terrible crash of the economy it is a pretty stable housing market. It is a new normal in that central bank interest rates below long term historical averages of around 3.5% or so is now embedded in affordability calculations by individuals (if not by banks).
22 Jun '17

Holding non ISA shares on a spread when we are expecting 15% + return is a major boost as it eliminates 28% capital gains for a 3.5% drag of interest payments on your holding. No need to use the leverage if you don't want.

At 10% growth roughly a wash . At 20% well worth it.

Of course the cash not deployed in the share can do other useful things so long as you can get at it in 3 days . Offset mortgage ideal or just having an unused credit line.

If you do use the leverage a bit it starts to look very attractive indeed.
22 Jun '17

but I can increase my return by leverage as much or more than that - and still stay in my comfort zone of a single share I know well. How much to lever is the question for me.

Also even though outside my ISA my leveraged spread holding is capital gains free. For fast growing shares that can be quite significant.

I started very diversified but discovered the hard way that is no guarantee of safety in a big downturn and I felt just did not know enough about the shares I was investing in to do "value investment". Just my own limitations of time and intellect.
22 Jun '17

I have no doubt that in theory and in practice switching as you do can enhance returns.

2x leverage can achieve the same or better boosted returns even applied on a single share one is very comfortable with.

However for me to switch about a bit and be comfortable I'd need to put more time into it. TEF absorbs too much of my time as it is. As a result I've taken my leverage on my non ISA holding down to historically low level (1.2 where I've had it hovering around 3x for years in spite of promising myself to limit it to 2x).

I am still all in and believe the terr sp 24 month trajectory but the more I am leveraged the more I nervously watch short term trends and news. I hardly check my ISA as there is never a decision to make. I just add every year the max allowed.

I just want to do a terr and sit back based on all we have discussed and watch my investment slowly but surely grow. I'm convinced before I retire I'll have a million pound ISA on current trends.

Maybe later I'll be more of an investor like you and have a more sophisticated strategy.
22 Jun '17

Strictly thanks for the history. YEs we need to feel TEF can grow in a 1989 to 1997 environment. I think they can. So downside risk is just a really big crash. TEF just does not need HP inflation to keep to it's expansionary business plan.


I think we can disregard all the macro. I think it is priced in and will only be a downside risk if it works out worse than expectations.

Why am I so confident it is priced in? Twofold. The risks I see are front page news day after painful day. Brexit bad for the economy, Trump is an idiot, Greece on the edge, Le Pen a fascist, etc etc.) The thing to be watchful for as an investor is an iceberg risk under the water line most don't see. Such a shy risk may not be priced in. Real war might be one of those but I think the odds are very low -less than 2% for UK.

Secondly actual market behaviour. Market for builders dropped a lot after Brexit vote. I agree with the market it was a blow but I also think the dip was proportional. The fact we are a growing company with a P/E of a growth constrained utility company says that there is a lot of risk price in. I think it is fully price in and upside risk is equal to downside risk.
22 Jun '17

thanks sain for the completion numbers. Easy to forget how low they were this year (delayed effect of land bank caution post crash) which must have hurt our SP. We will see some pretty sharp increases in build volume from here year on year and as such we can ride out nicely any plateau in HP inflation that is coming.

My own working assumption is that we will not plateau HP inflation in London for the next 5 years in nominal terms (in inflation adjusted terms a real decrease). I believe London as a whole will certainly keep pace with background inflationary increases and in TEF's regeneration and new infrastructure weighted patch it will be better than that.

TEF can and will expand volume year on year in a flattish HP inflationary market. It will simply be a bigger company in 5 years time producing 800 to 1000 units pa -baring some catastrophic (Probably Brexit related) crashing of the London economy.

My bigger hope is TEF can keep going at that expansion rate for 15 more years. Double volume every 5 years without SP dilution. It is the most viable route I can find to a million pound ISA by the time I need to "put my feet up" with a pint of Doom in my hand.

The UK house builders all make remarkable similar profit margins. Shows a pretty steady business for all. high barriers for entry and nobody cutting margins in order to grab market share.

I suspect that this similarity is due to land value arbitrage. Future profit is embedded in the cost of the land they need to build on so they will never deviate in the long run from what it is now. In the long run they do not really benefit much from HP inflation (although this can substantially flatter figures in the short run).

The key variable of long term shareholder value and price is thus volume. Volume is where there is wide variation of strategies and as a result wide variations in build rate increases.

I just can't see another UK builder who can credibly double build volume every 5 years for the next 20 at low risk. Some like TW are just too big to be able to do it even if they wanted to. They would saturate their own market niche within 10 years.

Smaller than TEF and I don't think you have the critical mass to do complex London regeneration schemes.

TEF is in my sweet spot and I know well the patch and job generation in that patch it operates in.
22 Jun '17

"If the P/E today is the benchmark. TEF SP should be about 513p next Spring and 607p the Spring after."

Terr's simple yet probably accurate way of predicting future SP. Assuming P/E is the main driver of SP and that P/E remains constant at current levels for 24 months we should be 607p by results 2019 based on well documented sales volumes heavily weighted by locked in pre sales.

This assumes the bad news on Brexit, Trump or any other black swan that may be about is priced in today with no more than the average amount of bad news to follow.

I am not an optimist about the next 24 months politically. I think the Tories don't have a viable strategy on Brexit, this will cause endless market turbulence and something will need to change.

Yet much of that observation is priced in. I think a pretty hard and damaging Brexit is priced in and any "softening" will be an upside SP bonus. What is not priced in is a chaotic crash out of the EU structures but I give the odds of that 5% and I suspect the market does something similar or lower. Crashing out of the EU would really bring about a UK recession and drop in nominal house prices every bit as deep as 1982 (16% interest rates, removal of tax deductibility for mortgages and horrific oil price spike. 2008 dip due to a complete freezing up of world wide bank to bank wholesale credit markets )

Signs we are moving towards a crash out of the EU structures will depress the market. Beyond 5% probably unpriced. Are the Tories stupid and Brexit obsessed enough to box us in so that happens, perhaps but only a 5% risk for me.

I'd love to see our government put forward a detailed interim arrangement it wishes to seek agreement for. Even the most delusional hard Brexiteer surely realizes there is no time for a bespoke final agreement now (even though Maybot probably still thinks so but her circuits are fried, assuming they were functional in the first place).

EFTA seems to me to be the obvious template and I don't really understand why the hard Brexiteers have not talked EFTA up as a way station to the hard Brexit they seem to want. Maybe they think that EFTA will be too comfortable a way station and the momentum towards a hard Brexit will permanently dissipate once we are in it.

I hate political risk as an investor. It is by it's nature very hard to predict. Much prefer economic and business risk to chew on.
21 Jun '17

Yes I suppose my focus on unit delivery is a simple one. If you cap the price per square foot at 1000 (TEF’s model I don’t want to see changed) and don’t increase unit size EPS growth via increased unit prices has a glass ceiling. House price inflation flatters EPS growth and hides underlying business model. I want a company that is expanding without HP growth. I think TEF is that company. I think the HP market only retraces in nominal inflation on really big events (twice only post war and for stupid reasons not necessarily to be repeated) but plateaus of price are common. I want a company that can expand through the plateaus.

The market above 1000/sq foot becomes much more limited in volume and subject to fashion and not housing need. I'd rather TEF avoid it for now.
21 Jun '17

great. I've been once and was quite a small affair so lots of opportunity to ask deep questions.

If my schedule permits I'll be there as well.

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