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Diary of a fund manager - Breaking Good or Breaking Bad? - 09.09.19

David Miller, Investment Director, Quilter Cheviot

Political drama, counter intuitive market moves, the state of markets as we enter the last few months of 2019 and why networks, whether in Vienna over a 100 years ago, or the modern internet variety, matter. All make an appearance in this week’s Diary. 

In a week of political drama, financial markets kept their collective head below the parapet. For the record, equities went up, with bonds and gold marginally down. Elsewhere, and seemingly ignoring events in Parliament, the pound rallied against both the dollar and the euro. In a routine video report to investors around Europe, my normal practice is to say the month and then get on with it. On this occasion I said the month, date and approximate time. Going on the record about what next for Brexit is a dangerous game.

The world is bothered by Brexit being by turn, fascinated, horrified and occasionally sympathetic. The Prime Minister is either playing a very subtle game or is bluffing with a weak hand. Collectively, investors have concluded the latter which is why from the middle of last week sterling started to go up. No exit from the EU on 31st October has become more possible, and so from the sometimes perverse perspective of financial markets what had been sold should now be bought. By the time you read this Diary or listen to the podcast, something else may have happened and so for now I won’t say more.

Going on the record about investment is, by comparison, more straightforward. German industrial production continues to fall, US employment numbers were indifferent, but still positive, and the value of WeWork being suggested by the investment bankers is now $20 billion which is less than half of the number first thought of a month ago. Inflation in the Netherlands is 3% and rising, whilst Korea seems to be heading towards deflation. As noted during the summer, when Marks & Spencer was flirting with demotion from the FTSE 100 index, it isn’t the retailing force it was once was. This week it officially joined the ranks of medium sized companies.

Much has been written about the inverted yield curve, negative interest rates and the apparent irrationality of investors prepared to accept a guaranteed loss between purchase and redemption. Who are these people and what are they thinking? Observations from JP Morgan identify the suspects as US investors diversifying away from the dollar, price insensitive insurance companies and pension funds trying to match assets and liabilities, and momentum driven hedge fund strategies. As with currency markets it sort of makes sense, at least for now. 

Apart from an occasional nod in the direction of the “noise”, my week was filled with discussions about “signals”. Are there any and if so what do they tell us about the direction of markets over the next few months and into the third decade of the 21st century? To start with, the trade dispute between the US and China isn’t going to be resolved quickly although there may be occasional truces. Companies are already changing the ways in which they operate as confidence that free trade is there forever ebbs. Linked to this, and equally important, is the way in which new alliances between countries and institutions are emerging as the US, along with its currency, goes home. Various flashpoints such as Hong Kong and the Middle East may grab the attention of markets, but not for now. 

A well-structured investment strategist based in Asia toured through our office presenting his considered views which may be summarised in three scenarios; recession, dislocation or muddle through. His conclusion was that the latter was the most likely. Our internal discussions reached a similar view, but with the additional challenge that the UK matters more to us than those based elsewhere. The UK is still a top 10 global economy and one of the most international in outlook. As a result, our financial markets are highly correlated to what happens elsewhere which over the last few years is just as well. The competitiveness of exporters, domestic inflation and the investment returns we report to many of our clients are, however, heavily dependent on exchange rate movements. The case can be made that sterling is now undervalued, but then again, not. Stress testing our strategies against a wide range of outcomes using reasonable assumptions and past correlations means that we are ready. It might be a rich mix of uncertainty, but for now nothing is breaking. 

Moving even further away from the headlines, an hour spent listening to an expert on the Viennese Modernists during the transition from the 19th to the 20th centuries was interesting and instructive. Despite being at the centre of the decaying Hapsburg empire, those with new ideas such as Wittgenstein, Mach, Freud, Klimt, Schiele and even Charles Rennie Mackintosh from Glasgow gathered in an atmosphere of tolerance and were creative. Pre-internet networks were just as powerful as they are today, although for practical reasons this one was predominantly European rather than global. With the benefit of hindsight, we know that a combination of two world wars, arrogance and ignorance destroyed the “old order,” but not the ideas that scattered around the world and are still with us today. Fifty million may have visited the World Fair in Paris in 1900 to see what was new, but these days billions of us exchange views every day. Whether this is a force for good or not is a matter of opinion, but in less tolerant times I suspect that centres of creativity are more likely to be virtual rather than physical.                 

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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