Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our stories this week:

Not the Whole Pie…
That canary in the coal mine….it’s Japanese.
Investing requires Good Judgement.

Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Cyril (Chief Investment Officer), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

Not the Whole Pie….

Budget announcements and government spending plans are not always the most riveting of reads. Buried away on page 97 of November's UK Autumn Statement [1] was, however, an exception. We read an indication that fractional shares are likely to be permitted inside an ISA wrapper in some form. This potentially brings some much needed clarity to a debate that's been raging amongst the major players in the industry and HMRC.

What are fractional shares? (A reminder...) - They are partial shares in a company. Trading in fractional shares means that investors can own less than a whole share. The big benefit of doing so is accessibility. Many of the world's largest companies trade at pretty high prices (Warren Buffet's Berkshire Hathaway Inc is currently valued at around $500 a share as an example) which can be expensive, particularly for those looking to invest in a global portfolio. Using just whole shares to replicate a globally diversified index; we at Sidekick estimate that this investing in a professionally managed and diversified global stock portfolio could cost more than £100,000. This is a high bar for many investors.

HMRC's position to date has been that only whole shares are eligible for inclusion within a tax wrapper so, in our view, this is welcome news for investors. Indeed, one expert described the current status quo as "a backward-looking stance". [2]

Alongside, there is also a longstanding concern from many industry commentators that UK customers do not always put their money to better use - as illustrated by the large cash balances accumulated during the pandemic sitting in low rate savings accounts. This is an issue where the UK regulator (the FCA) has recently intervened [3]. There's also other societal factors at play here; the low numbers of customers seeking financial advice and, conversely, the high take up of higher risk investment products. Fractional shares have an important role in helping to address some of these.

Are there risks? Yes of course, as with all investing, your capital is at risk. Specifically with fractionals, they cannot usually be transferred tax free to other investment providers as not all providers offer them. This may mean that they need to be sold which could mean some taxes have to be paid. There can also be some differences with how corporate actions work (more on these in future Market Pulses).

We have some additional content on our website if you'd like to know more https://support.sidekickmoney.com/.

What's next? The Government will be engaging with stakeholders so watch this space [4].

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That canary in the coal mine….it’s Japanese.

We believe thoughtful investing hinges on a deep understanding of global economic megatrends, which can often be obscured without a sufficiently broad and long-term perspective. Trends like digitalization and the shift to sustainability are well understood by investors, but others, such as 'Japanification', could also hold significant long-term investment implications.

There is ample evidence to suggest Japanification, marked by a declining birthrate leading to a shrinking and ageing population, is spreading to other developed economies[5]. Thanks to a birth rate of 1.3 babies per woman, significantly lower than the 2.1 required for population stability, Japan's population is projected to drop from 130 million to below 100 million by the 2050s.[6]. While a decreasing population can help the environment by alleviating global resource strain, it also brings economic challenges, like a rising old-age dependency ratio (the amount of retired people relative to the working age population) impacting not just the workforce but also government finances. With a shrinking workforce and a rising number of retirees, Japan faces reduced tax income and increased spending on healthcare and social security. Consequently, it should come as no big surprise that Japan has the largest national debt compared to its G7 counterparts.[7].

Japan could be the proverbial canary in a coal mine, giving us a glimpse of what's to come. Trends in Japan, like increased workforce participation by women and the elderly, alongside greater automation and the use of robotics, might foreshadow potential trends in other developed countries. With China's population expected to halve by 2100 and similar trends slowly unfolding in G7 countries, understanding and preparing for these seismic demographic shifts is crucial for long-term investors[8].

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Investing requires Good Judgement.

Financial forecasting has something of a poor reputation. Yogi Berra famously said: “It’s tough to make predictions, especially about the future” and Malkiel Burton added “financial forecasting appears to be a science that makes astrology look respectable”. But instead of relying on irrelevant information like quotes, we prefer to approach the topic with a bit more scientific rigour.

Phillip Tetlock, a psychology professor at UC Berkeley, has been studying the art of superforecasting since 1984. In 2011 his work caught the eye of the US intelligence community who funded a series of forecasting tournaments to figure out how to make their forecasts more accurate.

In the Good Judgement Project, thousands of forecasters participated making over 1 million predictions on more than 500 questions relevant to US national security. The teams were made up of talented amateur forecasters and professional US intelligence analysts with access to classified information. By iterating through and improving forecasting methods the Good Judgement teams materially outperformed the professional intelligence analysts[9].

One of the most surprising insights of the study was that superforecasting is a skill that can be learned and honed. It turns out there are 3 main ways to improve forecasting: more information, decreasing prediction bias, and ignoring the impact of noise or irrelevant information[10].

To test the theory, the Financial Times (FT) ran a competition during 2023 where a group of 8,500 FT readers competed against a team of superforecasters. Using a scoring system where 0.5 represents pure guesswork and 1 represents the all seeing Eye of Sauron, the FT readers scored a respectable 0.73. The superforecasters however, showed they are truly worthy of the name and scored 0.91.

In a previous Market Pulse we discussed the importance of geopolitical and macroeconomic events as drivers of long-term investment returns and the implications of the results from the superforecasting studies are clear. A team of superforecasting investors that focuses on gathering information and mitigating their biases should, in theory at least, be able to beat the market[11].

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Notices

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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