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Diary of a fund manager - Axioms, Assumptions and Optionality - 02.09.19

David Miller, Investment Director, Quilter Cheviot

In this week’s Diary news from around the world for those just back from the beach, a moderate amount about Brexit and two themes that look set to dominate the investment agenda for years to come.

Slowly the northern hemisphere is turning away from Summer. Last week equities moved higher, bonds were unchanged and in currency markets the pound was stable. Gold continued to attract buyers. The Americans and Canadians are definitely back at work, while southern Europe is still on ‘part time’. In London the leaves are turning brown although probably more from heat exhaustion than anything else. Welcome September where traditionally ambitious annual plans meet reality. In the UK the overlay of a Halloween Brexit adds more than a little spice to the mix.

A quick tour of the world provides the usual combination of insights and curiosities. In Argentina the 100 year bond bought by optimists in 2017 is now worth 40 cents in the dollar. Yet another default looms. US Treasuries maturing ten years from now yield less than equities and as the gap between winners and losers widens the importance of stock selection becomes ever more obvious. Germany is struggling to make the transition from clean energy because not enough wind turbines are being built. The plan at the moment is to switch off nuclear in 2022 and coal by 2038. Lithium prices are falling, because if you look for it there is a lot more around than first thought. Rough diamond prices are also falling not just because of lower demand, but also because the artificial variety is coming off the production line cheaper and better each year. Those who allocate the assets of the $1 trillion Norwegian Sovereign Wealth Fund are moving more into US equities, funded from Europe, whilst amongst mixed news from the UK property sector courtesy of the Savills monthly, evidence that activity in the regions is stronger than in London. In Leeds, for example, 58% of investment in office property during the first half of the year came from the middle-east.

News from the US remains reasonable. The economy is trundling along despite regularly disturbing trade negotiation tweets. Business confidence has been affected by this uncertainty, but consumers continue to spend. There seems to be a mini-boom at the moment aided by full employment, rising wages and perhaps a bit of pre-tariff bargain hunting. Whether this will last through the rest of the year is hard to tell as usually business and consumer confidence are joined at the hip. Earnings forecasts for the current quarter are not particularly encouraging although see above about stock selection.

And so to the UK where the politics of Brexit is defying the laws of mathematics by presenting multiple binary outcomes. Even those whose role in life is to dispense certainty are struggling. The most sensible approach to fund management in this environment are solutions with a strong dose of optionality. The only certainty is that nothing, whether the way in which Parliament functions when it is open for business, or the cohesiveness of the UK, will ever be the same again. In amongst all of this the new Chancellor will be announcing a spending review, but I doubt that it will be anything more than playing politics ahead of an undeclared, or perhaps non-existent election. Interestingly, all of this is having very little noticeable effect on UK financial markets. Investors have had three years to build uncertainty into their portfolios.

Back to government spending for a moment, but taking a more global view. A developing theme is that fiscal conservatism, otherwise known as austerity, is becoming less fashionable. A decade of quantitative easing may have changed everything for business and investment, but from the point of view of governments it looks like a victimless crime. Dark warnings of hyperinflation proved far from the truth and so printing money to ‘oil the wheels’ is no longer considered an unacceptable policy. In Asia; Japan, Indonesia, Thailand and South Korea are all moving in this direction. Even Singapore might join in. This is what happens when growth is in short supply and low interest rates aren’t having the desired effect. Europe is different mainly because of Germany, but even there the pressure is building on the government to increase spending. Now that really would be news worth paying attention to. When linked to discussions about reordering corporate priorities with shareholder value being demoted it is clear that investors need to be increasingly careful about how they allocate their capital, whether by geography, asset class, sector or company.

In a changing world axiomatic assumptions are there to be challenged.            

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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