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Diary of a Fund Manager - New Wave

Date: 29 November 2021

In this week’s Diary, what to do about new Covid, another uncontrolled experiment to add to the list of potential trouble spots in the decade ahead and why China and Russia have agreed to agree. Finally, news from the second hand book market.

Some weeks defy attempts at simplification. Last week was one of them. Pre-Thanksgiving lethargy was suddenly replaced by a credible Covid threat. For the record, equities ended down, but all the decline happened on Friday. And bonds up, proving once again that bad value is no deterrent when safety becomes a priority. Oil fell by 10%, whilst other industrial commodities rallied. Sterling underperformed both the euro and the US dollar. The gold price fell back for reasons that are not entirely clear.

For many in the US, Thanksgiving Thursday is an opportunity to extend a one day holiday into a long weekend. When there is new news, empty trading desks can exaggerate volatility. Comparing notes with a couple of hedge fund managers an additional reason to sell emerged. After a good year both had already been thinking of ‘closing the books on 2021’ and so a new Covid variant was as good an excuse as any to take profits. One final thought about short term volatility before moving on to the slightly longer term is that highly leveraged investors tend to sell first and ask questions later. Rather like one of the crew sent to find Colonel Kurtz in the film Apocalypse Now, who was described by the narrator as being ‘too tightly wrapped to survive long in the jungle’- he didn’t. So it is with those who borrow and borrow again to make short term incremental investment gains.

Moving on from the immediate reaction to the Omicron Covid mutation, what next? As an aside, Omicron is the Greek letter for ‘O’. Why not Nu or Xi which were next in line you may ask? Apparently, it was decided that Nu is easily confused with new and Xi might cause offence in China. Writing for immediate and irreversible publication has many advantages, but in this case those of you reading this Diary later today or tomorrow may know more than I do. The list of uncertainties is long; infection rate, how dangerous, immunity to current vaccines. Only time and research will provide the answers. What is, however, clear is that our reaction time to this new health challenge has been shortened by past experiences. Even sentimental politicians intent on providing voters with a happy Christmas can’t see the upside of stubborn denial. No one is assuming that the Omicron variant can be kept out however strong border controls are. It has already arrived in Europe and it must be only a matter of time before it crosses the Atlantic. If previous new waves tell us anything it is that markets tend to look forward as soon as the worst is known. Investment strategists are already reducing growth forecasts for next year, which is bad news, and moderating assumptions about the need for higher interest rates, good news. The latter is likely to be the dominant factor when it comes to making a positive case for 2022. For now the only sensible course of action for long term investors is to adapt to the present rather than to try to forecast the future. I repeat myself I know.

The list of uncertainties is long; infection rate, how dangerous, immunity to current vaccines. Only time and research will provide the answers.

Last week’s Diary contained comments about the unintended consequences of various uncontrolled experiments running in parallel at the moment. A reader pointed out that he would add one more. Combining massive central bank buying of listed assets with passive investment funds, index trackers, that have become increasingly dominant in the last decade. Neither are price sensitive buyers which goes some way to explaining why success is rewarded with ever higher valuations. If one or either of these supports is kicked away a reset is likely.

China features quite regularly in these Diaries, including last week, but Russia less so. Separately or together, both have the ability to destabilise the existing world order. Size matters as much as wealth and in combination they account for one sixth of the land area of the world. Mutual suspicion between Russia and China has in recent years been replaced by cooperation. Both have permanent seats on the UN Security Council and any differences in policy are almost impossible to detect; China leads in Asia, Russia in Europe and the Middle East, whilst issues in Africa and Latin America are agreed on a case by case basis. President Putin crossed the Rubicon of dictatorship many years ago, but has now been joined by President Xi. Neither could now hand over power and stay safe. They are roughly the same age; Putin 7th October 1952 and Xi 15th June 1953. Short of revolution or ill health both are likely to be around for a number of years. Perhaps 2030 or 2035. Here today gone tomorrow democratically elected presidents and prime ministers should take note.

Several years ago a selection of 100 of the first 200 Diaries was published. Quilter Cheviot was entirely supportive, but insisted that we weren’t booksellers and so copies were to be given away free. Last week I received a LinkedIn message from someone who I have never met explaining that her 15 year old daughter had found a copy in a second hand bookshop and had added it to her Christmas list. Unfortunately, by the time her dutiful mother returned to the shop it had been sold. As there were still a few copies in storage I was, of course, happy to send a pristine new copy, but did have the presence of mind to check the after-market price. From zero to £8.99 in three years is either a good return or another sign of inflation.

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