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Diary of a fund manager - Changes - 13.11.17

David Miller, Investment Director, Quilter Cheviot

Change is everywhere, whether in Saudi Arabia, Silicon Valley or trying to earn a living in the UK. This week’s Diary is a mix of today and tomorrow, details and generalisations, together with a bit of inter-disciplinary speculation thrown in for good measure.

Apart from Japan, equities had a poor week, bonds also, whilst currency markets did little to disturb the scorer. Gold and oil did, however, with both moving higher. Locking up senior members of the Saudi establishment disturbed the equilibrium of those with a well-defined list of things to worry about, adding uncertainty that has implications throughout the Middle East. Well considered, or not, western governments seem prepared to back the palace revolution, with Donald Trump tweeting: ‘I have great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing…’. Instant experts of Saudi genealogy and the labyrinthine interconnections between governments, factions and religions, dusted down their maps of the region to explain what will happen next. Approximately 20% of global oil production flows through the Strait of Hormuz which, at its narrowest, separates Iran and Saudi Arabia by only 29 miles. Yet again, financial markets reacted with studied calm, but watch this space for unintended consequences.

Elsewhere, Taiwanese inflation and exports are now on a downward track. To answer the ‘so what’ question, Taiwan’s economy is highly sensitive to global economic growth and the government has a reputation for sending out unvarnished real numbers, unlike some of its neighbours. Other than that it was business as usual, with US tax reform discussions continuing and a proposed $130 billion takeover of chip manufacturer Qualcomm by Broadcom. If it happens, it will create a $200 billion company, equivalent in size to General Motors and Ford combined. Assuming no job losses, the new group would employ just under 40,000 people, compared to 400,000 making good American cars. The growing gap between newer industries and employment is stark.

However, as with all long-term trends, there is the present to deal with. Last week, seemingly out of nowhere, came news that, despite doubts about the stability of the British Government along with Brexit uncertainty, a survey of UK recruitment consultants reported not only an increase in permanent placements, but also that these recruits were able to secure higher pay. Separately the Bank of England also concurred. It seems that those with the right qualifications are in short supply and so can ask for more. Talking to someone who employs people across the pay range, but with a weighting towards the lower end of the scale, above inflation pay rises this year are seen as an insurance against being forced to play catch up next year should UK inflation continue to rise. For all sorts of reasons, 3-4% this year and perhaps the same next is seen as better than 2% now and a lot more the year after. Who or what pays for higher wages will be company specific, but the candidates are consumers, profit margins or shareholders through lower, or at least not higher, dividends.

Normally I wouldn’t pay too much attention to Bank of England surveys at such an early stage, but if their latest findings are true, then this is a rare glimmer of optimism to light the current UK gloom. What really caught my attention was a well-researched hedge fund report linking wage rises to an increase in UK discretionary spending and specifically why wage growth will primarily feed consumption growth. Although it is vital to avoid long-term losers, sometimes it pays to focus on the here and now. Companies that will benefit from an improvement in UK consumer spending and more generally, businesses perceived to be closely associated with UK economic growth are not expensive. The knock-on effect through the system, including the scope for higher interest rates or a stronger pound, would cause many, including me, to take another look at our list of sloppy assumptions.

Over the decades, we have become used to making decisions based on a western framework. Recent conversations with those from a different background highlighted why this is a dangerous assumption. The centre of gravity of the global economy is shifting and, as it does, we can see the growing influence of non-western money, where decisions are being made using a different rule book. History has always been local, but I am told the same goes for philosophy, legality, morality and truth. Apparently, Indian philosophy has close links with the Greek version, but in China the emphasis is on wisdom. Still in China, laws are thought to distract from practising virtue. Those from countries with borders that have moved on a regular basis throughout history, for example in Eastern Europe or more obviously along the Silk Road, have a very different perspective to those living in countries with unchanging borders like the UK or US. If invading armies have passed your front door on a regular basis, survival is based on doing deals, but those deals only last until the next ‘unrefusable’ offer comes along.

Whether it’s East versus West, populists against elites or the essential tension between innovation and authority, ‘the times they are a-changin’.

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients.


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