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Diary of a Fund Manager - Changing Times

In this week’s Diary, differing COVID policies, thoughts on why the Chinese government is interfering in business and the many consequences of the technological revolution. The times they are a changin’.

In the grand scheme of things it was a quiet week for investors. US and European equities ended down, Asian markets higher, bonds drifted lower and the US dollar strengthened. Commodities oscillated in a trendless way. Transitions can be like that.

The big questions are clear to all, but the answers remain just out of reach. For the record, the ECB announced that it might become slightly less supportive over the next six months and the British government raised taxes. Evergrande, one of China’s largest property developers, is struggling to pay its debts. On average, European junk bonds now offer a return which is less than inflation. Never let it be said that heroic risk taking has gone out of fashion.

COVID policies differ from country to country and, just like the virus, are mutating. At present, there are two distinct approaches. In Europe, including the UK, and North America the plan is vaccinate and reopen, despite the increased risk of infection, whilst in much of Asia Pacific zero tolerance and restrictions remain at the top of the policy agenda. Infection surges in vaccinated Israel and Iceland, fewer Delta infections than expected in Sweden all add to the mix and confusion. Those living in democracies will eventually have the chance to express an opinion on which route they prefer; open up and take your chances or continue to shelter, starting with the Canadian Federal Election on 20 September.

China is not a democracy, but even powerful one-party states need the goodwill of the people. In the last few decades this has been sustained by rising living standards with free enterprise the driving force. This is why increasingly intrusive government interference in the business of business is generating so much concern. Is this yet another example of dictatorial over-reach or is there a rational plan which the rest of the world needs to understand and adapt to? The answer is by no means clear. History is littered with examples where the former flew high before crashing back to earth.

Looking back over the last few years, the turning point for China might have been when the Trump Administration tried to cripple the Chinese technology sector. Trade tariffs were all part of the game but trying to put a leading company like Huawei out of business was an entirely different matter. If this was war, albeit an economic one, then business priorities would need to change either voluntarily or, as seems to be happening now, by order. Fewer computer games, more domestically manufactured semi-conductors, hardware not social media apps. In a command and control economy like China this can be made to happen whether shareholders like it or not.

For the record, the ECB announced that it might become slightly less supportive over the next six months and the British government raised taxes.

Just like the industrial revolution which started in the 18th century, the technology revolution has no end in sight. The internet has decentralised power with far reaching consequences. Will we use this power well or waste it? Will governments be able to hold on to power? Looking back 250 years to the early years of the industrial revolution, some built steam engines, whilst others made pretty automata for idle rulers. Even further back in time, astronomers in many places mapped the heavens. Some used this knowledge to ensure that religious festivals happened on the right day, whilst others used the stars to circumnavigate the world. Empires rise and fall on such choices.

After decades on the back foot, big government is back in fashion. Attempts to control the agenda of change are hard to ignore and can last for a long time. Creativity and innovation will, however, eventually find places where it is most comfortable and these are seldom in the corridors of power.

Astronomy, steam engines - what has any of this to do making good investment decisions in our modern world? Well, as General Eisenhower said, plans are worthless, but planning is essential and the same goes for speculating about what might happen in the years ahead. In this time of change there will be many routes to the future, many of which will prove to be dead ends, whilst some will widen into superhighways. Although satisfying to be right this will only become clear with hindsight, which is why the priority for fund managers is to adapt to the future rather than spend too much time trying to forecast it.

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