DIARY OF A FUND MANAGER - BREAD AND CIRCUSES 07.07.20

In this week’s Diary, post-lockdown recovery news, observations about what will matter to markets over the next few months and some hard to answer questions.

Over the last two weeks markets have been spinning wheels as investors ponder the future. Neither optimists nor pessimists seem prepared to add conviction to their views. The impending quarterly results season could break the logjam or perhaps consumers, having remerged into the sunlight, will retreat behind closed doors once again. The virus is, of course, still there even in the ‘cleanest’ countries.

Before turning to the unknown future, evidence is gathering that the recent past has been better than expected. The economic numbers published in recent weeks show a strong recovery, albeit from a very low base. In China it is back to normal with precautions and testing, whilst German retail sales have delivered an optimistic V-shaped bounceback. Cars are starting to roll off production lines which is good for morale. US employment growth, which beat expectations for the second month in a row, included 2.8 million new leisure and retail sector jobs. Staying on the other side of the Atlantic for a moment, when speaking to the locals there is a distinct fear that the rate of new infections will either dampen consumer confidence or provoke state governments to impose new restrictions. After an initial surge consumer card spending is down 10% in recent weeks, whilst only 53% of working age Americans have a job compared to 65% in 2000.

Speed reading all that came in during my few device-free days was interesting if inconclusive. The consensus is that support by central banks and governments has been the driving force behind the strength of markets since late March. To put the scale of the support operation into context, the amount of money pumped into the system is estimated to be 20 times the Marshall Plan put in place to reconstruct Europe after the Second World War and five times Roosevelt’s New Deal rolled out in the 1930s when the US was mired in a depression.

Despite this, inflation indices remain close to zero, but inflation hedges are getting more expensive as investors look to the future. Buying the dip remains the consensus strategy on the basis that there will be further stimulus packages during the summer months and that central banks will remain supportive. Governments around the world may have similar objectives, but their methods vary. The more structured seem to be outperforming the ‘bread and circuses’ variety.

One of the advantages of working in isolation is that the time spent travelling has fallen to zero. The schedule of meetings in recent days would have been impossible in the past. Reporting to clients in various parts of the country, webinars with financial advisers and others looking for guidance, an encouraging update from India despite the increase in the infection rate and an appearance on Sky News all went into the mix. Will we ever go back to face to face meetings, trains and planes, 8am pre-meeting bacon rolls in Cambridge after an early start from London or the unexpected interactions that come from walking in the streets? I hope so, but only in part I suspect.

The benefits of communication are numerous, but my favourites are feedback and hard to answer questions. Last week was full of both. Of immediate concern were questions about the prospects for the rest of the year, but beyond that were important issues that occupy the list of known unknowns. Human nature seems to prefer dealing with short-term problems and background noise, but it is also important to consider issues of substance. Picking up a few of the challenges I was presented with to make the point;

  • Is there a limit to the amount of debt that governments and companies can issue?

    Given that by year end total global debt could be $200 trillion or a debt/GDP ratio of 278%, this is a hard one. We can speculate on the way out of this problem, but not with any certainty. Inflation, confiscation or it doesn’t matter as long as there is economic growth are all credible answers.

  • Why can some central banks print money with no adverse consequences whereas others reap the whirlwind of economic collapse?

    The best answer to this is that it is a mystery and that only time will tell. What is clearer is that attempts to support economies in recent decades have succeeded, but at the expense of political and social instability. Having visited the US in the mid-1970s, as well as more recently, I can tell you that it has changed.

  • Will a mix of bonds and equities continue to deliver good returns in the future?

    For 50 years a 60/40 portfolio (60% equities and 40% bonds) delivered excellent returns, but now that bonds yield close to zero can they still be relied on to earn a different return to equities or are they just another form of risk? Searching for alternative sources of return seems sensible, but then again that has always been the case. Real stores of wealth never go out of fashion.

The detail of investment matters hugely when it comes to earning a return, but within a framework of uncertainty. There are certain questions that we may not able to answer, but won’t go away.  

Something else that has been with us for 50 years is the jumbo jet. An unconfirmed rumour is that Boeing will cease production of the 747 when the last 16 on order are delivered. When the first one flew in 1969 it seemed miraculous that it was able to leave the ground, but it went on to change the way we travel. All things pass I suppose.

Written by

David Miller
Investment Director

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