Lowes Magazine Issue 121

DOUG’S DIGEST

A picture is worth a thousand words

WE HAVE ALL HEARD THE PHRASE “A PICTURE IS WORTH a thousand words”, and this is relied upon heavily within the world of economics where no presentation comes without several charts and tables to demonstrate the point being made. Even this article is a very good case in point! The use of charts as a visual representation of statistical analysis can be very useful. As an example, the chart below of the FTSE 100 also includes the 50 day and 200 day moving averages for the index. A simple rule of thumb is that when the shorter average (in this case 50 days) moves above the longer average (200 days on the chart), then this signals a bullish trend, with prices generally moving upwards. The reverse, when the shorter average moves below the longer average, is considered a signal that the opposite is about to happen, with prices generally falling.

The second, more serious, chart shows the MSCI China index, which tracks the growth of the large- and mid-cap stocks in the Chinese stock market. As can be seen, it grew strongly throughout 2020, and at the start of 2021 there was no indication that this should not continue. But in February 2021 the Chinese Communist Party introduced regulations restricting technology companies which up to that point had been driving the growth in the index. The dramatic effect this had on the index is clear, but no chart produced in early February 2021 would have shown anything other than a strongly rising market. 900 800 700 600 500 400 300 200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cheese consumed Bedsheet tanglings Cheese consumed (in pounds) Source: https://www.tylervigen.com/spurious-correlations Per capita cheese consumption in US vs Number of people who died by becoming tangled in bedsheets 33.5 33 32.5 32 31.5 31 30.5 30 29.5 29 28.5

Bedsheet tanglings

FTSE 100 Price Chart

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Golden Cross - Short term average moves above long term Death Cross - Short term average moves above long term

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MSCI China

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FTSE 100

50 Day Average

200 Day Average

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Source: FE Analytics

For frequent traders these crossover points, known as a Golden Cross and a Death Cross respectively, are sometimes used as potential buy and sell signals when applied to single company shares. As can be seen from the chart, however, these signals can come after a large part of the gain or loss has already happened when the price isn’t moving dramatically. They are therefore used only as one of many such indicators by professional traders. We regularly meet with fund managers who will have a presentation containing several charts to understandably show why they think the particular area or asset class they invest in should be given consideration. At first glance they can be very compelling, but the important thing is to challenge the link or trend being shown, both to make sure it is correct, but also it can be relied upon to continue going forward. As a humourous example, we have a chart produced using data from the US Department of Agriculture and Centers for Disease Control & Prevention. One of a number shown in a book called Spurious Correlations, it demonstrates how a relationship can seem to exist between two random sets of data. Suffice it to say we wouldn’t recommend anyone scours the obituaries as an indicator of when to invest in cheese manufacturers.

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Percentage growth

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At Lowes we never rely solely on the information provided by the fund house. We always do our own analytical research on a fund, and wherever possible meet with the manager face to face, (albeit in a virtual format in recent times), so they can be challenged and we can get a better understanding of how robust their investment hypothesis is. Only when we are comfortable that a fund can consistently perform as expected will we include it in a portfolio, and even then, we will try to diversify where possible to mitigate sudden unpredictable changes as happened in China last year. Source: FE Analytics

Lowes Financial Management and Lowes Investment Management are authorised and regulated by the Financial Conduct Authority Visit: www.Lowes.co.uk | Call: 0191 281 8811 | Email: enquiry@Lowes.co.uk

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