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Diary of a Fund Manager - Cold Sun

Date: 18 October 2021

In this week’s Diary, early news from the company results season, more central bank action and the link between global gas supply and the prospects for a mild winter in the UK. Finally, another quote from a long ago Labour Prime Minister.

In the round it was a good week for investors. Equites, bonds and gold all ended higher. The pound remained the currency of choice amongst the major economies and raw material prices ranging from copper to oil rewarded investors and punished users.

After a couple of months of top down generalisations, many of which did more harm than good, at last it’s time for the company results season when we hear about conditions at ground level. The short term game is for earnings forecasts, guided down by the companies themselves, to be beaten by a respectable amount, followed by positive headlines and rising share prices. Although it is still early days this is what seems to be happening. Hence, the better week for equity indices.

Beneath the surface, what we will be told in the next month will be far more important than a fractional gain here or there. Which companies are continuing to thrive despite supply chain problems? Which have been able to put up prices to compensate for higher input prices and more expensive energy? These things will become clearer as the season progresses. Delving even deeper will provide a portrait of us. Google searches rather than gilded Facebook posts.

A couple of snippets before the deluge in the weeks ahead; JP Morgan results were satisfactory, but loan demand was reported to be sluggish. By implication, confidence has been tempered by uncertainty. Premier chip manufacturer TSMC has grown 22% in the last year helped by price rises of between 5 and 20%. Over the next three years expenditure on research, development and increasing manufacturing capacity is likely to be of the order of $100 billion. The tenth largest company in the world is doing well and would probably be worth even more if it wasn’t based in Taiwan and quite so close to China. In the grand scheme of things, 100 miles is a bit close for comfort.

Economists may be undecided about the future, but central banks have a plan. Last week it was Chile’s turn with an interest rate increase of 1.25% to 2.75% against a background of 5.8% inflation. The US Federal Reserve and ECB continue to play the two stage game of less quantitative easing in the months ahead followed by higher rates in the more distant future. However, both continue to warn that action will be taken if events dictate. Warnings can be as effective as action, but are open to differing interpretations. Equity investors seem to have reached a different conclusion to the bond market. Goldilocks, not too hot, not too cold for shares, versus recession in the next couple of years for bonds. Interestingly, those who work for the Fed as opposed to the decision making members of the FOMC, are less concerned about inflation and more worried about the supply chain hit to growth than their ‘masters’. In tandem with JP Morgan’s loan growth comment, US money supply is falling, as is the velocity of money in the financial system. In other words, there is plenty of cash around, but it is languishing in deposit accounts rather than being put to good use. US companies have bought back a record $870 billion of their own shares so far this year, enhancing current earnings but hardly a vote in favour of the future. Incrementally investors will edge towards the truth. Success comes from adapting to the future, not forecasting it.

Premier chip manufacturer TSMC has grown 22% in the last year helped by price rises of between 5 and 20%.

Being a fund manager has many privileges, but my favourite is having the right to be interested in whatever might be relevant to the business of investment and then to have access to enlightening experts. Much has been said and written about the current problems of the energy supply industry. From Russia to the UK there are unresolved issues that will affect everything as the cost of energy ranks alongside the cost of money in terms of importance to investors. From an informative mid-week presentation, the observation that since the collapse of the Soviet Union, Russia has been investing in order to develop its gas industry and diversify its customer base. Nord Stream 2 is just the latest attempt to reduce dependence on the Ukraine route to Europe. Also, that the gas sent to China from Eastern Siberia is from an entirely different field with its own production and transportation infrastructure and so has no effect on the amount pumped to Europe. Undoubtedly, politics is involved, but for Russia the increase in demand and higher prices are a windfall. The smile on President Putin’s face is likely to get ever wider as we head into the Northern Hemisphere winter.

Closer to home, came the prediction that the UK is unlikely to experience power cuts, just higher electricity prices. The months ahead are, however, likely to be a bit of a tightrope. If the winter is mild then all should be well. A ten day repeat of the ‘Beast from the East’ wouldn’t be welcome, but manageable, as industry would shut down production in response to temporarily higher prices. The problem would be if we experience a long cold winter like last year. Then the tightrope could start to wobble. Years of under investment and wishful thinking means that there is nothing the government can do but hope for the best. Right on cue, the minister responsible for business, energy and industrial strategy added long range weather forecasting to his job description, predicting a mild winter. What price candles, camping stoves and diesel generators?

The white heat of technology, as invoked by Harold Wilson in a speech nearly 60 years ago, remains a good way of describing change, but is not the only one. The cold sun that illuminates our Covid affected present continues to cast a long shadow.

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