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Diary of a Fund Manager - Early Christmas - 03.12.18

This week’s Diary picks up on some of the events highlighted last time. In particular, US interest rates, Italian finances and trade wars. Also, some observations from the real world about the widening gulf between buyers and sellers when it comes to agreeing the right price.

Christmas has arrived a few weeks early and markets, simple souls as they are, celebrated without much reflection. Equity market moves were almost the mirror image of the week before, all ending higher with the US in the lead. The dollar was strong, but not much else stirred. There was no sign of a seasonal bounce for oil despite the recent sharp decline, but the approaching OPEC meeting later this week was a valid excuse for torpor.

As I wrote about in last week’s Diary, investors are for the moment, focused on events with binary outcomes. In recent days doors have been opened a bit rather than closed and this was enough to push prices higher after two months of declines. The principal catalyst was a speech by the Chairman of the US Fed. In summary, he indicated that although US interest rates would continue to rise, he, and the other members of the Board, would pay attention to the health of the economy and also global events. If a pause in the plan to raise interest rates in 2019 appears prudent then, so be it. This might not seem much, but it was enough for a 5% rally on Wednesday. A torrent of diverse comment followed with the consensus settling on the opinion that the early part of next year could be more benign than feared. Recent numbers suggest that recent US economic activity is slowing at the margin and so this seems entirely sensible.

Next on the list of things to worry about was Italy and there the mood music from the government shifted slightly towards compromise, rather than confrontation, with the EU and financial markets. Again, this was enough to bring the optimists out of hiding. Italian banking and financial services company, UniCredit took advantage of the lull to raise €3 billion by selling a ten year bond to one investor thought to be Pimco. Last time UniCredit came to the market for money it offered an interest rate of 1%. This time it was 7.83%. In these ways it is possible to quantify the extra risk assigned to investing in Italy and the damage done when politicians decide to take on the world.

To see faint signs of a US slow down requires good eyesight. In contrast, EU economies are quite clearly doing a lot worse than anticipated and those who live there have noticed. Fear of unemployment has been rising since the summer. Elsewhere, the plan by the Greek government to start raising money in a normal way through the issue of a ten year bond has been cancelled, because the interest rate required was too high.

This is the closest ‘stop the presses; we need to change the front page’ Diary ever. Following news from Buenos Aires that US and China have agreed to be friends again. Planned tariff increased have been put to one side. We will see about that, but assuming that Mr Trump will resist the temptation to send rude tweets from Air Force One on his way home, this news should be good enough for last week’s rally to continue, this time with Asian markets joining in.

Beneath the headlines, reality has been more mixed. It was interesting to note that several proposed deals failed to progress beyond the initial talks stage. Uber and Deliveroo won’t be joining up because of a huge disagreement about the right price. Similarly, shopping centre owner Intu won’t be going private because potential investors have backed off. Brexit was blamed, but more likely it is uncertainty about the real value of the underlying assets. When it comes to writing cheques at the moment buyers are at the Scrooge end of the spectrum. Those trying to sell central London mansions will know the feeling.

Settling aside Presidential hugs in Buenos Aires, suspicion about Chinese intentions remains a very public concern. A trade war truce may have been declared, but the reasons for hostilities have not gone away. Theft of intellectual property and a loss of leadership in the technology sector continue to preoccupy governments and companies alike. Should Huawei’s 5G telecom equipment be installed in the UK and Germany or not is yet another example of the ‘Trojan Horse’ problem. It’s very hard to tell what will happen until the gates have been opened.

And so to December. Business and markets have been making Brexit decisions for some time, but now it’s the turn of the politicians as the debate turns critical. Careers will be made and destroyed over the next 10 days in ways only seen a few times a century. This year is far from over and although Christmas parties have been fixed, I suspect that it will be full tilt to midday on Christmas Eve when, collectively, we do seem able to take a break.

Christmas also came early to Dulwich. Listening to the melodies of Bach’s Christmas Oratorio written nearly 300 years ago in a chapel built in 1616 was the perfect end to a long week.

Ask David a question

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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