On the face of it, the announcement of severe spending cuts on Wednesday had no impact on the stock market whatever. But that is wholly misleading in my view. I believe the Comprehensive Spending Review has made a major impact. It is just that the effect took place in the months since we were told the cuts were coming.
We have known that the danger of Britain getting into a worse tangle over its debt has been removed. So there has been growing confidence that there will be no need for high interest rates on British government debt. That has meant that all interest rates in Britain have stayed low, which has provided a double whammy benefit: British companies have been paying relatively low interest rates on their debt, and investors have found dividend yields on shares attractive compared with other forms of saving.
If that sounds complex or unconvincing, the examples of Ireland and Greece demonstrate what a difference debt control makes. These countries have been struggling with their debt and their credibility and, whereas British shares are slightly up this year, Irish ones are down more than a fifth since May and Greek ones are down about a third this year. The Comprehensive Spending Review has ensured that we have not gone down anywhere near that scary road and have instead been moving towards safer ground.
In fact, one of my British shares reached such a high valuation recently that I have now sold most of my holding. Soon after I bought shares in SuperGroup, which owns the fast-growing SuperDry brand of clothing, I already felt that the rating was too racy for me. I wrote here how I would be glad to get out of the shares at the same price I paid – £10.20. In fact, the shares have kept on driving upwards and I have now sold most of my holding for an average profit of about 6pc. But it is always difficult to persuade oneself to sell almost anything.
In behavioural economics this reluctance is called “the endowment effect”. People become attached to their shares that have gone up. Almost affectionate. I mentioned this to my stockbroker who said that he comes across it often. He suggests to clients that they sell something which, he thinks, is fully valued or perhaps overvalued. The client replies: “Oh no! I can’t sell that. It is has done well for me.” It is almost as though the shares were employees who had put in a good effort and should not be rewarded with the sack. But of course shares are just shares. They are pieces of paper – or not even that, these days.
In selling my SuperGroup shares, I remain delighted to see a British company growing at such a sensational rate. But the shares have priced in several years of rapid growth. If anything goes wrong, they will fall. If all goes well, a rise will take place but it will probably not be sensational. Yet even after all this brutal realism, I have to admit I have kept a few. I tell myself it is my way of keeping an eye on them in case they become good value in future. I have also sold more of my shares in Home Product Center, a DIY company in Thailand. Although most people will never have heard of it, these sales are a much bigger wrench for me. I have quadrupled my money in dear, old Home Product Center. I glow at the mention of its sweet-sounding name. It is like selling a buddy. But, the shares have whooshed up with the boom in the Thai stock market and they are now more than 20 times forecast earnings. Again, I have not had the heart to sell them all. But I am gradually reducing my stake.
And buying what? I have bought shares on far lower ratings. I have increased yet further my stake in Jacques Vert, which creates clothes for women and is on a far more stable footing than it has been for years. Yet at 15.3p the shares stand at only 5.7 times forecast earnings for this year. And I have also bought more shares in Real Estate Investors. This property company has cash amounting to more than half the value of its shares and also plenty of increased rental income on the way.
In other words, I have been selling my more expensive shares and buying cheaper ones. It is not exactly a revolutionary idea but it makes the portfolio safer and usually brings higher returns in the long run.
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