Against the backdrop of institutional vandalism in the US, the optimism of the world's equity markets in the early weeks of the Trump presidency is remarkable. It is one thing to acknowledge that deficit-funded spending to upgrade America's aged infrastructure will bring benefits, both short and long term. But this hardly outweighs the potential for dislocation and damage that the Trump insurgency brings.
It has the feeling of Mao Zedong's infamous 100 Flowers Campaign - "Let 100 flowers blossom, let 100 schools of thought contend" - urged the murderous maniac Mao. The Trump version runs more along the lines of "let 100 Republicans, specially selected for the blatant incompatibility of their views, sit in government where they'll squabble bitterly and I'll pick the winner". As a recipe for divide and rule - while thrilling his constituency - Mr Trump's tactic could hardly be bettered. As a way to disrupt the smooth running of the world's most powerful stabilising force, it is deeply worrying.
And, in his small way, Bearbull is affected - in particular by the selections I want to make for the Bearbull Income Portfolio. Recall that for the past three weeks I have been debating which stocks to add, with a particular preference for gold miner Pan African Resources (PAF) and clothing retailer Next (NXT). There is also casualty insurer Lancashire Holdings (LRE) and property investor Primary Health Properties (PHP). Both of these - inconveniently - announce results later this week, though Primary Health is probably excluded because its characteristics are too similar to Empiric Student Property (ESP), whose shares are already in the Bearbull portfolio. Then there is pubs operator Marston's (MARS) and building products supplier SIG (SHI).
Among high-yield candidates, Marston's is unusual to the extent that it has been trading well. In the first four months of its 2016-17 financial year, like-for-like sales were 1.5 per cent higher than a strong comparative period. Yet that's not likely to last.
Almost as remarkable as the political events of the past eight months has been the willingness of UK consumers to spend their extra disposable income (the amount grew by 2.8 per cent in 2015 and, most likely, another 1 per cent last year) and then to borrow when the cash ran out. The trouble is that rising inflation will stop that. It will eat into real incomes even as the rise in nominal wages comes under pressure, thus ditching the inclination to borrow more. Of course, the worst would be if rising inflation pushes up interest rates, especially mortgage rates. That could - probably would - prompt the ratcheting downwards in spending that usually accompanies a drop in house prices as middle Britain frets about the erosion of its paper wealth.
These possibilities are real enough to dismiss the idea of buying shares in a performer as moderate as Marston's. In the past seven years, it has generated just about enough free cash to fund its dividend (though not if we exclude the effect of 2009-10 when free cash topped £100m). True, in that period, the group's heavy capital spending has been more in line with a fast-growing company than one operating in a mature industry. That means the cap-ex tap could be turned off, releasing cash, which would be nice. Against that is the thought that Marston's future returns won't be enough to generate extra value from all the capital it has laid out. The stagnation of its share price these past four years indicates the market has such doubts.
Similar reservations apply to SIG. Supplying the construction industry has been no fun in recent years, a comment reflected in SIG's static turnover and variable profits. Despite that, it has kept its debt fairly well under control - though the net figure is currently above management's target ratio to cash profits - and it has always generated enough free cash to cover its dividend, with the exception of 2015.
These are fine merits, which imply that SIG's shares may be good to own - but not yet. It's a question of momentum - upwards momentum in the share price, that is. It's a factor to which I rarely give much attention, but maybe I need to revise that in the light of the income portfolio's sub-market performance in 2016. Put simply, too many companies in the portfolio currently suffer a momentum deficit; their trading outlook seems too dull to give the share price a lift and I don't want to add to that burden with SIG shares.
True, I may yet persuade myself in the case of Next (see last week's column). The absence of a cyclical consumer stock in the portfolio, the strength of Next's market position, its ability to produce the free cash that will support a payout that currently generates an 8.5 per cent dividend yield all point in its favour. Meanwhile, shares in Pan African Resources offer something that neither Next nor the others can offer - thanks to their connection to the gold price, likely protection against Trump's vandals. Actually, I added 125,000 shares in Pan African some days ago, at 15.75p each.
