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Diary of a Fund Manager - Middle Ground

In this week’s Diary conventional politics, company results, reflections on past periods of political change and finally more politics, this time of the identity variety. There is never a dull moment.

As events unfolded and October turned into November, markets responded well enough with equities, bonds and gold all ending higher for the week. The pound was steady against the euro as yet another Brexit deadline passed. Although the US dollar weakened against the rest, news from the States was satisfactory. Glimmers of economic stability including respectable employment numbers were satisfactory and the Fed reduced interest rates by a further 0.25%. On both sides of the Atlantic the investment background is very different to what was expected a year ago. Predictions about 2020 should be handled with care.

In the UK, the big news of the week was the announcement of a general election on 12th December. Early opinion polls look eerily similar to those published at the start of the 2017 campaign. Those predicting certainty do so at their peril. A volatile electorate now has over a month to make up its collective mind. Unlike the politicians, investors are occupying the middle ground.

With the earnings results season in full swing there were plenty of facts to colour in our view of the recent past. Companies have learned how to manage expectations and so surprises were few and far between. Those obsessed by averages continue to worry about the lack of earnings growth, but in the real world there are enough examples of growth to satisfy the optimists. In a world of negative interest rates and low inflation, even anaemic growth is to be celebrated.

With still more results to come a few themes are emerging. The technology companies may be getting a bad press, but sales 20-30% higher than a year ago are hard to criticise. Those that sell ordinary things to ordinary people are eking out a respectable living, whilst companies that sell luxuries continue to benefit from our discretionary spending. Pharmaceutical companies, despite threats from politicians in search of a vote, are delivering higher earnings and good dividends. Against one of the reports sent to our hard working team of analysts I noted, ‘what’s not to like’. 

Interestingly, even those that continue to show the scars of the uncertainty did not suffer the double-digit share price falls that have been the order of the day over the last few results seasons. Investors seem to be prepared to buy growth at a reasonable price and be patient with those seen to be trying hard in difficult circumstances. Only those that make a loss and have no plans to be profitable are in the firing line. Another change of trend to note.

Brexit fatigue has been replaced by ‘what if’ questions about political change, or at least potential change. As the main parties roll out their manifestos, I suspect that these questions will intensify and quite rightly so. This time around the result is uncertain and will matter, which is not always the case.

The game of back to the 1970s should, however, be avoided when it comes to making investment decisions. UK investors had far fewer choices back then. Locked in by exchange controls, it was difficult to escape from high inflation, incompetent government and indifferent companies. Portfolios containing a balance of gilts, UK equities and property provided imperfect protection from the deadly combination of low growth, inflation and high taxation.

These days there is much more choice. Market forces may occasionally do bad things, but globalisation of money does make it far harder for governments to be incompetent for long. Together with the globalisation of information and globalisation of trade, our ‘uncertain’ present seems unwilling to follow the script of the past.

A few weeks ago I reported on a discussion between Ed Miliband and a Naomi Klein about climate change. This took place against a background of Extinction Rebellion demonstrations in central London. Last week, in the interests of balance, I attended a discussion organised by The Spectator between Douglas Murray and Lionel Shriver about identity politics. Similarities between the two discussions were hard to find other than that both events attracted large audiences presumably in search of guidance during a time of change.

It was, however, obvious that attendees at both events wanted to have their existing opinions reinforced. Trigger words provoked murmurs of agreement and an occasional alleluia. On reflection, I wonder how many had attended both events and mischievously it struck me that it would have been interesting to see the reaction if the speakers had been swapped around appearing in front of the other audience. Would British good manners and tolerance have survived beyond the first few minutes? Sadly, I suspect not.

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