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Diary of a fund manager - Binary Week - 10.12.18

David Miller, Investment Director, Quilter Cheviot

Presidential tweets and an arrest warrant, EU politics in a state of flux and, of course, Brexit conspire to make volatility a large part of the daily diet of investment last week. Under the surface, pockets of value are appearing, but no one is paying much attention at the moment.

The positive mood lasted about two days, but by the end of the week equities were down between 3% and 5%. Bonds moved higher as did gold. Currency markets were relatively quiet, whilst oil responded positively to news of an OPEC production cut. In part, the midweek reversal might be attributed to growing concerns about a slowdown in the US economy, but more immediately one of the more predictable issues raised in last week’s Diary surfaced with a presidential tweet expressing doubts about the trade war cease fire that had been agreed over the preceding weekend in Buenos Aires. Entirely unexpected, but also touched on last week was the arrest of the CFO of Huawei as she changed planes in Vancouver. The long arm of US justice seems to know no bounds. A major diplomatic incident has erupted with thoughts of a warming in relations between China and the US put to one side. Non-investment issues are also dominating the European agenda. In Germany, Angela Merkel’s successor as party leader of the CDU has been elected, and in France riots in the streets seem likely to limit President Macron’s global ambitions. With EU leadership in a state of flux just as Brexit reaches boiling point, it’s hard to know who has the authority to compromise should one be asked for.

All of this brings us to Brexit. The permutations remain too numerous for markets and so there is a genuine chance that whatever happens isn’t ‘in the price’.  Sterling may well swing within a wide range depending on the outcome and the decisions that follow. Since the referendum foreign investors have been steady buyers of UK assets, but whether takeovers or property purchases, there is a sense of wait and see which could last until next March. The European Court of Justice judgement that the UK could withdraw Article 50 without the agreement of the other members of the EU has added other potential outcomes.

Undeterred by all this noise, analysts continue to analyse the fundamentals of what should drive investment markets next year. It was comforting to read several reports suggesting that recent pessimism has been overdone and that equities are the preferred area of investment for 2019. Undoubtedly earnings growth this year and early indications of further progress next, leave markets on reasonable ratings. The more uncertainty the better, with emerging markets and the UK looking cheap.

Away from the day to day mechanics of investment, my week included a number of interesting conversations. Large hedge funds are having another poor year and there is a distinct feeling that asset allocators are reducing exposure. In contrast, smaller funds are able to exploit pockets of inefficiency unavailable to the sector leaders. The impact of artificial intelligence is a running theme in these Diaries. It was, therefore, useful to debate its impact on insurance underwriting with a leading practitioner. Better access to information is an undoubted benefit, but when it comes to accepting a hard to assess risk, face to face meetings remain the preferred way of doing business. Several years ago a regular reader told me that he expected retail outlets and restaurants to offer customers free electricity as a way of winning business. At the time I noted it in a Diary and was surprised at the number of responses, many of which expressed incredulity. Now we hear that Tesco will be offering free charging for electric cars at some stores from next year.

My week finished at the London Business School where I was quizzed for an hour by a large group of MBA students about markets, politics and fund management. It was a real ‘United Nations’ gathering with only four UK passport holders in the room – I asked. Whatever happens with Brexit, English is the language of business and our colleges and universities remain very well regarded.

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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. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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