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Diary of a Fund Manager: No safe spaces 11.09.17

David Miller, Investment Director, Quilter Cheviot

If change makes you nervous then perhaps you should give this week’s Diary a miss. There are no safe spaces in the real world, whether from the forces of nature, the effects of the sharing economy or memories of the 1987 crash. Trigger warning alert.

In a week of contrasts and surprises, financial markets seem to be in a holding pattern, awaiting further instructions. Equities drifted lower, whilst bonds, oil and gold moved ahead. The dollar continued its steady decline to the extent that the semi-informed are now as convinced about further weakness as they were about fortress America at the start of the year. The use of surely and obvious should be banned from polite society. Unremarked, hedge funds are making reasonable returns, not only in August but for 10 months in a row. On the PPE front (see last week), Harvey and Irma have changed the agenda. Almost every page of my daily chart pack, from short-term interest rates to commodity prices, shows that nature is more powerful than presidents and central bankers.

Stemming from this, the surprise of the week was that President Trump did a deal, albeit with the Democrats and against the wishes of many Republican politicians. The debt ceiling problem has gone away until December, or maybe as far out as early March. It will be interesting to see whether the Fed also makes a weather-related decision about changing policy when it meets in a few weeks’ time. Politics and policy have been affected by reality. Now we need to see whether there is a longer term effect on economic growth.

Numbers matter, as long as they are the right numbers in the right order. Back in March, I complained about a classic example of number-blind politicians and bureaucrats conspiring to cause trouble with the announcement that the discount rate used to calculate compensation claims would be reduced from +2.5% to -0.75%. The reasons were spun into a potential vote winner without any understanding of the monetary cost to insurance companies, the NHS and all consumers who buy insurance. This is now ‘understood’, and a climb-down has begun with some very elegant reverse spin. The final number is expected to be somewhere between 0 and 1%.

One of the pleasures of writing a weekly note is the feedback that I receive. Last week, I made a casual comment about how the average car is unused for 95% of its lifetime. It seems that this is quite well known, but then the discussion moved on with thoughts about whether expensive houses are really worth it and so on. Some of the suggestions were so un-PC as to be unprintable, even with a trigger warning. This did, however, motivate me to read the report containing the car statistic: The Current and Future State of the Sharing Economy, published by The Brookings Institution. The formal definition of the sharing economy is the peer-to-peer based activity of obtaining, giving or sharing access to goods and services. From Airbnb to Uber, consumers are using technology to change the shape of the economy and at an increasingly rapid rate.

Interestingly, companies are less keen to share their assets than people, but it’s only a matter of time. A quote to savour, which cuts to the heart of the matter: ‘People don’t fundamentally want stuff. What they want is a stream of services that stuff provides over time.’ For example: ‘I want a hole in the wall, not a power drill.’ As technology makes sharing and renting cheaper, expect more of this along with attempts by governments and established companies to throw regulatory grit into the wheels of change. A natural extension is a return to barter as a component of daily life. Lending you my drill for a day in exchange for your lawnmower doesn’t need to involve money and will be hard to tax. Perhaps the trigger warning is that those unprepared for radical change will find the future rather scary.

Post-holiday, it was back to business as usual with trips to Chester and Cambridge, via the CNBC studio and much else in between. The Chester economy is also in a holding pattern as the major employers in the area make Brexit plans. The Cambridge visit was for a reunion dinner and a chance to test the hypothesis that wisdom and age are joined at the hip. Could it be that we have remained more radical than the current generation of students protected, as they are, by ‘safe zones’? Whilst there, I was fortunate to meet a world expert on battery chemistry and so was able to ask some basic questions about likely efficiency gains over the next few years and whether there was anything beyond lithium technology.

And so to CNBC for 30 minutes on a quiet news day. Unplanned, the conversation turned to the 30th anniversary of Black Monday on 19th October when the Dow Jones index fell by 508 points or 22.6% in one day. That’s the equivalent of nearly 5000 points today. Memories aside, we debated whether the major market setbacks in recent years were in any way connected, because if they are then this should give us guidance about the future. The 1987 crash was all over in a few days, whereas the bursting of the technology bubble in 2000 took three years to work through the system. When the Fed unexpectedly raised interest rates in 1994, bonds fell more than equities. Then, the credit crunch was different again. All happened for different reasons and had different effects. The only common factor that I can identify is the importance of staying calm and rational if and when the storm hits.

At lunch with my favourite serial non-executive director, insights into the real world overwhelmed the quality of the food. Observations about the skills needed by chief executives were particularly interesting. Honesty and integrity feature as you might expect, but being an optimist also helps because this has a positive effect on staff, customers and shareholders. What surprised me was to be told that analysts are critical of pessimistic chief executives who are too honest about difficult business conditions. No wonder there are so few sell notes in my inbox.

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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