My Citywire column this week touches on the subject of financial and economic cycles. You can see the column here:

As I say in my column I am dubious though curious. I think cycles have some potency and some ratios are evidently useful. But I worry about the correlation/causation argument and for many of these cycles, there doesn’t seem to be much explanation of why the process is evident. That makes the cliodynamics historian Peter Turchin different – he does go into great detail about why these cycles might work and the processes lying behind them i.e elite overproduction.

Anyway, the column was designed to provoke debate and further reading and I would simply observe that amongst the US hedge fund/trader community, cycles are hugely popular and that the track record of Charteris is also impressive, especially when it comes to its precious metals fund.

Anyway, my column did not include some very useful charts which I have included today in this blog.

They both refer to the 18-year cycle, the first of which is in property. As I said in the column I’ve heard many, many property experts talk about this cycle.

Property cycles

The other fascinating circa 18-year cycle is in commodities. Again, the chart below is from Charteris and shows a widely used measure in hedge fund land which compares the GSCI commodity cycle (the old Goldman Sachs commodities index) with the S&P 500.

Commodity cycles


If any country’s stockmarkets deserves to benefit from a positive cycle, it’s Japan. Its investors have had a tough few years/decades although, over the last year, everything seemed to be looking much rosier. But in recent weeks we have seen a sharp reversal.

Here’s a good summary from the quant desk at SocGen : “The Nikkei 225’s reversal has been abrupt as it was outperforming the S&P 500 by almost 500bp in USD terms toward the end of February, which has now turned into 1000bp underperformance. The reversal of Yen weakness has not helped, but given Japan is typically an industrial cyclical bell-weather, the slump in performance raises some questions. Japan, along with other regions, has seen healthy upgrades to 2021 earnings forecast (+8.5% so far this year), and earnings momentum – the ratio of upgrades to total estimate changes – is strong, although peaking in late February along with the Nikkei 225. The chart below is from Sharepad – the red line is the 20 day MA, the green line the 200 day MA, the blue line the S&P 500″.

If Japan sounds interesting, it might be worth another look at Baillie Gifford’s Shin Nippon fund. Back in mid March the fund released numbers and Killik & Co’s funds’ supremo Mick Gilligan put out this useful note which I have abbreviated somewhat.

McKinsey issued a report last summer which highlighted how important increased automation and digitisation will be for Japan over the next decade. This is particularly important in Japan’s labour market which suffers from a very low birth rate and rising life expectancy. The report estimated that two thirds of repetitive work activities could be automated (see chart below). Baillie Gifford Shin Nippon, with a focus on fast growing smaller companies should be well placed to benefit from any increase in productivity enhancing technologies. As always with small cap growth situations, valuations tend to be high and offer little comfort for those seeking value. Portfolios like these should benefit over time for the mathematics of the return asymmetry that comes with small disruptive growth stocks. The most an individual holding can fall is 100%, the most it can rise is infinite. BGS remains on our buy list but expect returns to remain volatile for and size positions accordingly.

“ Baillie Gifford Shin Nippon aims for long-term capital growth principally through investment in small Japanese companies with above average growth prospects. The portfolio manager, Baillie Gifford, invests in 40–80 attractively valued smaller companies that it believes offer good growth opportunities and takes a three-to-five-year view. Up to 10% of total assets can be invested in private companies. Growth may come from innovative business models, disrupting traditional Japanese practices or market opportunities, such as growth from overseas. In today’s statement, the portfolio manager highlights a significant acceleration in certain business and consumer trends. It notes that, historically, Japanese businesses have been notoriously slow in adopting modern business practices, including the use of technology. The discerning nature of Japanese consumers who value personal contact and high standards of service has insulated brick and mortar retailers from online disruption. This has resulted in slower e-commerce penetration in Japan compared to other developed markets. This situation has been shaken up by the pandemic as restrictions have forced consumers and companies to adapt. Traditional business practices, consumption patterns and the provision of critical services like healthcare have all witnessed a fundamental shift due to the pandemic. As McKinsey highlights, fewer than 1,000 Japanese care institutions offered remote care in 2018; by July 2020, more than 16,000 did. The manager highlights that smaller companies have benefitted significantly from these trends as they have generally been at the vanguard of change in Japan. Both businesses and consumers are realising the value that technology and online services bring to the table, and therefore the manager thinks many of these trends are likely to persist over the long-term.

Summary of key information:

  • The NAV was +37.2%, share price +43.2%, MSCI Japan Small cap Index +6.3% and MSCI Japan Small cap Growth Index +12.8%.
  • The shares moved from a 1.4% discount to a 5.4% premium and currently trade at a 3.2% premium.
  • 21,715,000 shares (7.8% of share capital) were issued during the period raising £55.4m of new capital.
  • Gearing fell marginally from 10% to 8%. Loans with a blended interest rate of 1.86% were replaced with a new three-year loan at an interest rate of 1.4%.
  • Key contributors to performance include (Online legal portal, shares +151%) and Demae-Can (online food delivery, +161%). Istyle (Cosmetics retailer, -13%) was a key detractor to performance.
  • Ongoing charges for the year fell from 0.73% to 0.71%.