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Diary of a fund manager - Empires and Mavericks - 04.02.19

David Miller, Investment Director, Quilter Cheviot

Good company results, indifferent economics and bad politics all feature in this week’s Diary along with thoughts on whether China will come to dominate the global economy in the next decade. Also, what science fiction writer and scientist Isaac Asimov had to say about mavericks.

It was a good week to be an investor with equities, bonds and gold all ending higher. The pound weakened slightly against other leading currencies. Results for 2018 cascaded into the public domain along with some important news from the  US Federal Reserve. Starting with the facts of the matter, what people do, not what they worry about. On balance, corporate numbers are encouraging. It’s hard to complain when the leviathans like Amazon and Facebook deliver  20% plus revenue growth, whilst Microsoft and Visa, which have been around a lot longer, are still growing at mid-teen rates. Safe and steady defensive companies also continue to find ways to grow, even if at a less spectacular rate.

A month ago the Fed jumped on bad markets with the warning that interest rates would be going up in 2019 and perhaps by more than expected. At this month’s meeting it was all change. The next move in rates might not be up, the reversal of QE might be put on hold and inflation, although ‘ever watchful’, is not going to provoke a reaction unless the numbers say so. We are used to forward guidance which changes in increments and so as you may imagine this 180 degree turn caught the attention of investors. Simple souls that we are, when a sweetie is put in front of us we eat it rather than worry too much about the future. The reasons given for this change were the slowdown of global economic activity, particularly in China, and the impact of the US government shutdown, both of which seem entirely plausible. Hidden reasons and consequences are for strategists to divine, but range from early action ahead of a looming recession to being reckless with inflation.

Reporting to an investment committee I was asked about the relative merits of economic analysis and stock selection when it came to making investment decisions and, by implication, a good return. My reply was that both matter, but analysing companies is much more straight forward. At the moment there is a divergence between the two with the economic statistics proving to be less encouraging than what we are hearing from the corporate world. In the EU, Germany, Spain and Italy are all slowing, albeit for different reasons; whilst in Asia, China has been decelerating for a while now despite government action to stimulate growth. We are now seeing the knock on effect around the world. As pointed out to me by someone who has been involved in transportation for decades, if Chinese consumers buy 5 million fewer cars this year than last, a reduction of 20%, then this is a problem for the German car industry and by association the German economy. Coalition tensions are rising as the Merkel era comes to an end. Then again, the US employment numbers announced on Friday were good and ahead of expectations. On closer inspection, however, a lot of the new jobs were in retail and leisure with many part time. Quantity rather than quality unfortunately with good middle class careers still in short supply for the children of the boomer generation.

A theme running through the company results season has been the adverse impact of the slowdown of the Chinese economy on the companies most heavily exposed. Right on time, JP Morgan delivered a 152 page tome with the title ‘Will made in China 2025 reshape the global economy?’. Dutifully I got stuck in and, all credit due, there was a lot of good stuff on every page, but , my overall impression is that there are just so many variables that things could go any number of ways. The biggest variable is the clash with the US about economic dominance. Predicting the outcome is next to impossible and that’s before factoring in the maverick decisions of President Trump. Isaac Asimov, a fine scientist and good story teller, had something to say about this in his Foundation trilogy, first published in the 1950s. The carefully constructed plans of the psychohistorians designed to smooth the transition from an overly bureaucratic and decaying empire to the new order were interrupted by the arrival of one person, a maverick who did not behave as people are supposed to. Chaos ensued.

The temptation to think that change follows a smooth curve should be avoided. History is littered with step changes.

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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