Births, Marriages & Not Dead Yets
17th Nov 2021
As we celebrate the half century milestone for our one and only Paul Marriage, this month’s Insight delves into the parallels of 1971 and 2021. Paul explores the similarities beyond the inflationary backdrop and ponders how the current UK small-cap market will evolve in decades to come.
Have you ever noticed how many people are born in the teens of November? I’m in that not very select bunch and whenever I see all the Valentine’s Day tat on display in February, I have a little chuckle. I don’t go as far as pointing to the sky to remember my late parents a la pros in other more televised careers do when they score goals, hit centuries, and the like. This month marks the muted bat raise and nod to the pavilion that my real cricket career never achieved (highest score 35, C&B by a one-armed spinner…). It seems that we are talking about the 1970s a lot more of late as perhaps there are some parallel’s today. Maybe more so at one year into the 2020s than we had hoped for, this decade started with a lot of excitement about a repeat of the roaring 1920s with all the messy economic and political stuff that followed still ten years away.
With a degree in history, but a complete lack of macroeconomic nous, I’m only partially qualified to look a little deeper into the parallels but here goes. I apologise in advance to both readers who recall this like yesterday and those who did their economic history thesis on the Nixon Shock. 1971 was a year when there were portents of some of the bigger challenges ahead, inflation, in particular, was picking up, but energy prices had not yet started to soar. UK companies were investing in plenty of R&D but were lagging in their investment in production efficiency. Intel launched their first microprocessor (the 4004 CPU) in November 1971 – a very small start to something that would make an enormous impact to global economies in the next 50 years. The plethora of 2021 scaremongers often refer to the winter of discontent repeating, but that was a whole 7 years later in 1978 when a Labour government fell out with the unions and ultimately the decline in heavy industrials in the UK was accelerated as Thatcher came to power and broke their grip on productivity. To say any more would be getting political. The economy and its representation on the stock market has a very different structure today, Renold (£75m cap, +163% YTD) is one of the few remaining traditional industrials from that era still listed and Intel ($205bn, +1% YTD) is ubiquitous inside and out1. The so-called ‘robber barons’ of the internet that Intel enabled are 10x bigger today.
Which products launched in November 2021 will have the same impact? A search on their estate would suggest the IoT, more big data, 3d printing mass adoption, and probably not the Mark V Range Rover. Just don’t get me started on the Metaverse.
What did UK plcs face in 1971 that influenced share price performance most? Interest rates in the UK actually fell from 7% to 5% in 1971. They started to move in 1972 to peak 14.25% in 1976, briefly dipping before rising again to close off the decade at 17.25%2.
GDP actually grew by 3.5% in 1971. The unemployment rate in 1971 started at 3.8% and ended at 4.4%, a tad lower than is recorded today based on the ONS stats. Unemployment dropped sharply in ‘72 and ‘73 before it started its rip up to 10% a decade later. So actually 1971 was a relatively benign environment with only modest clear signs of trouble to come with the standout being inflation – CPI surged from 5.5 % to 9.5% in the year. Today we have rising inflation and interest rates from a very low base and falling unemployment from the 2020 spike. Our friends at the ONS in Cardiff (my colleague Seb is on first name terms with some of the lady statisticians there) have some very handy charts.
In stock market terms 1971 was a stellar year, the FT Actuaries index, which ultimately became the FTSE All-Share celebrated its 10th year with a 41% return. It was also the year that that Nasdaq launched at 100, a mere 15760 points ago as I write1. Something rather special will have to happen in the last few weeks of the year for even the mighty small-cap market to beat that this time around; a repeat of the last few weeks of 2020 would do the trick. It was interesting to see how muted the market’s reaction was to Pfizer data on their Covid drug this month compared to the ecstatic and prolonged rally that the same firm’s vaccine efficacy delivered last year. It was 1973 before global equity markets got spooked by the Bretton Woods Conference and the oil crisis and even then the correlation between UK and US markets was less marked.
Looking at our UK small-cap universe we see a remarkable number of survivors such as Volex, Johnson Service, Young’s Brewery, Gresham House, Sanderson Design (Walker Greenbank of not so very long ago). Many of these have naturally had definitive periods to own and disown; Volex being a great recent example as a commodity maker of power leads became a world leader in EV charging components in the last five years. One of our oldest and most consistent vets is probably VP group which came to market in 1973. I often cite this as an early example of a successful family business becoming a very sound long-term plc – as the founding Pilkington family still owns 50%3.
On floatation, the founder sold £3m of stock to enable the listing, today the family stake is worth £200m and the original £3m adjusted for inflation would be worth £38m. This company has been a consistent dividend payer too, rarely yielding less than 3%4. For what it is worth we think the 2021 valuation of the business is unjustly modest and makes the business vulnerable to a predator if the Pilkingtons were to raise the half-century bat and retire themselves. Overall investing in UK small caps in 1971 against larger caps would have been a very astute move – and that is largely why Tellworth exists so here is a chart courtesy of our friends at Numis just to remind you that smaller companies are where it’s at.
Long-run returns of size ranked indices, 1971-2021
Source: Numis index data, as at 16/11/21. Small = Numis Smaller Companies Index Excluding Investment Companies, Mid = Numis Mid Cap Index Excluding Investment Companies, Large = Numis Large Cap Index Excluding Investment Companies
There are a few 1971 things this author craves – Ipswich Town being in the top flight of English football, an original 1971 Mark I Range Rover in Tuscan Blue (not part of Tellworth’s ESG policy), and Geoffrey Boycott’s batting average of 100.12. None of these are likely to become 2021 or 2022 realities, but I’ll keep dreaming while the small caps keep getting bigger.
1 Bloomberg, as at 16/11/21
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