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Diary of a Fund Manager - The Lights Are On

In this week’s Diary, more from the companies that make the market and the central banks that set the price of money before returning to events in China. Change is in the air, but just as 200 years ago when Jane Austen was writing about rural stability, the signs of change are clear despite being between the lines rather than in the headlines.

Lack of movement should not be mistaken for lack of action or, as a sign over a long-ago science teachers desk informed impatient students, ‘I may be at rest, but my mind is always active.’ Markets had a quiet week. Equities ended down a fraction, bonds slightly higher, gold and oil made modest progress and the US dollar drifted lower. Those in search of a windscreen squashed their spurious insects to no effect; disappointing results from Amazon, Iranian aggression, various comments from the US Federal Reserve. The list goes on. Not far below the surface, however, there was much to take note of.

The quarterly results avalanche continues to fill in the gaps in our understanding of the new reality, but as I wrote last week, nothing particularly unexpected is emerging. Full credit to the Quilter Cheviot research analysts who delved into the details and churned out their reports. Not quite 24/7, but on some days close to 18/7. Short-term volatility is a fact of investment life, but longer-term we have our collective say. The technology bubble may exist at the periphery, but the core remains rock solid and no more expensive than other sectors. For example, Alphabet, which includes Google, reported excellent earnings growth in all areas with another 15-20% increase expected in the year ahead, but trades on a price earning ratio of only 26. In contrast BAT, formerly known as British American Tobacco, can be bought on a rating of 8 with a yield of 8.5%. The combination of moral rejection and legislative risk is clear to see. As an aside, the words beneath the BAT corporate logo are, ‘A Better Tomorrow’ and the homepage states that ‘we have a clear purpose to build A Better Tomorrow, by reducing the health impact of our business’. I make no comment.

As an aside and, on the subject of changing work patterns, I was interested to receive an email from the department that produces valuations and maintains our client records asking all of us to resist the temptation to make changes between 11pm and 7am during which time the system catches up on the previous day. I can’t imagine that this request would have been thought necessary in pre-pandemic office-based days.

Elsewhere, minor central banks continue to raise interest rates to underline their commitment to fighting inflation. Last week it was the turn of Hungary. In contrast the ‘majors’ are showing no signs of movement, although less quantitative easing support is getting closer. In the corporate world those under more pressure last year are benefitting from the global economic recovery. Deutsche Bank is scaling back plans to cut jobs and other costs, as is Boeing. Across the board demand is rising. The problem remains supply which continues to suffer from pandemic-induced bottlenecks. One small business owner who I spoke to last week commented that losing a customer is regrettable, but losing a supplier is a disaster.

Change is in the air, but just as 200 years ago when Jane Austen was writing about rural stability, the signs of change are clear despite being between the lines rather than in the headlines.

Quite rightly, daily infection rates remain high on the agenda with arguments about statistical validity common. Overall it is clear that countries with a comprehensive vaccination programme are doing a lot better than those that haven’t made much progress. Many parts of Asia and Australia seem most at risk, with further lockdowns likely. Social cohesion, which worked last year, is proving less effective against the Delta variant, highlighting yet again the dangers of complacency.

Events in China are keeping all of us on our toes. A few weeks ago the suspension of Didi’s ride-hailing app caused a storm, but with hindsight was just an early warning of trouble to come. Now the private tutoring sector is under what may prove to be a terminal threat as the authorities try to make education the responsibility of the state alone. International investors are trying to get out of the way before the next regulatory tightening is announced. Thoughtful and thoughtless reports are littering my inbox with the balance in favour of the latter. The risks of investment in China are increasingly asymmetric with selectivity important. Local investors are buying the dip which doesn’t make them right, but is interesting nonetheless.

Looking further out I suspect that the Chinese government will continue to apply pressure to areas that it disapproves of and support those that are perceived to be useful. The infrastructure of the technology sector, including chip manufacturing remains a strategic imperative, but social media ephemera less so. Delivering improvements in living standards to the Chinese population remains a government priority and I am sure it is understood that private enterprise has been the driving force behind growth in recent decades. We seem to be in a period of adjustment rather than the start of an ideological firestorm. After all, this is the 21st century not the 20th.

Talking of centuries my leisure reading has been in the past for a while now. Jerusalem by Simon Sebag Montefiore has been gap filling my inadequate knowledge of the Middle East, with Jane Austen as a mixer for tranquillity. The world she described may be one of rural stability, but the signs of change were clear. The industrial revolution was starting to have an effect and the replacement of the horse and carriage by railways was just a few years in the future. Not far from Hampshire the French Revolution and the American War of Independence were recent news and Napoleon current. Thirty years after her death in 1817 the world that she described would already have seemed quaint. Whether we are in for a similar period of change is a matter for speculation, but what we do know is that despite all the challenges in recent years, the lights are on and burning brightly.

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