DIARY OF A FUND MANAGER - JUGGLING ACT 22.06.20

In this week’s Diary a survey of the many balls in the air at the moment before returning to the ground level detail of investment as we re-emerge into a changed world.

Turn by turn markets have good weeks and bad, but not necessarily across the board. Last week it was the turn of equities to shine along with the US dollar and gold. Bonds were left to one side. Consistency is in short supply.

Are we grappling with a problem to be solved or do we just have a list of questions without answers? Those striving to provide a coherent description of the future are getting nowhere. That financial markets have been buoyant in recent months is a fact that investors have come to accept and at one level the picture has become clearer.

Undoubtedly, we are in the midst of a very deep recession caused by a unique event, but one where governments and central banks have responded extraordinarily quickly providing huge amounts of financial support. There may be many things that we have to cope with for the first time, but in broad terms investors understand how to handle recessions. Recovery takes time and so patience and selectivity are at a premium.

Beyond that it gets more complicated with the unknowns piling up. Those who study the details of the global economy understand the scale of the setback seen this year, but differ in their analysis of what the system will do next. Will the scars heal leaving everything pretty much as before, or will the damage be permanent? The focus of attention is on how commerce and consumers respond to the end of lockdown.

The next part of this disconnected puzzle is the virus. In some parts of the world the first wave is far from over whereas a second wave appears to be lurking in the background elsewhere. It is somewhat surprising that so far investors seem prepared to ignore this issue given the trouble that it caused earlier in the year, but there you are.

And finally what about the politicians? I tend to avoid this area as much as possible on the basis that their influence on financial markets is less than they wish to believe, but as we roll through the summer months into autumn it will be hard to ignore the growing list of ‘hotspots’ dotted around the world. One, several or none may be sufficiently important to capture our investment attention, but on past form it’s better to await events than worry too much in advance.

Having thrown these balls into the air, and reminding myself that this diary is about fund management, the last week was not without interest. The reopening of non-essential shops was a highlight in the UK, although for the moment high streets and shopping centres are far from crowded. With eight million furloughed, price and necessity are likely to dominate buying decisions.

In the US, the numbers are larger, but it’s the same side of the same coin. New credit card delinquencies are down as consumers save rather than spend, but there is also evidence that rents are not being paid. News from India remains as mixed as ever, but it is hard to fault the ambition of the government as it drives infrastructure spending forward. New Zealand has had a good war against this virus, but turning a healthy country into a growing economy is proving difficult.

Detailed discussions about investment provide some clarity. As supply chains shorten and health becomes a differentiator between countries and regions, asset allocation is becoming more important, but beyond that it is what the companies do that matters most. Looking around all of us can see the answers. In no particular order, the beneficiaries of those that operate online, particularly retail, or those which provide healthcare services, consumer staples, heating, lighting and power and technology components. On the other hand, no amount of imaginative financial engineering will turn a sow’s ear into a silk purse. Companies which borrowed too much in the past and now offer unwanted products or services have unsustainable capital structures that investors should avoid.

I finished my week by contributing to a London Business School investment course. I have been doing so at least annually for the last five years and it is always a pleasure. This time, of course, we were scattered all around the place rather than sitting in the purpose-built lecture theatre, but the question and answer format worked pretty well.

Connecting the practicalities of investment to the theory has always been important for those intending to work in finance, but now even more so. Theories are proved or disproved by experimental results and undoubtedly we are in the middle of a huge experiment. Not all the theoretical truths of investment will survive. The questions from the students based around the world were challenging as ever and they were polite enough to accept my incomplete answers. I wish them well when they have the opportunity to turn what they are learning into practice.

As the year reaches half way it’s time for a few days off so no Diary next week.

Written by

David Miller
Investment Director

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