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Diary of a fund manager - Hello 2019 - 07.01.19

David Miller, Investment Director, Quilter Cheviot

This week’s Diary, the first of 2019, contains a brief look back at 2018 before moving on to the future, populated, as ever, by known unknowns and unknown unknowns. Opportunities and threats are the only constants.

It is three weeks since the last Diary and markets have been all over the place. Quiet days, half days, empty desks and public holidays failed to suppress volatility or calm nervous investors. On balance, equities are down by a few percent since mid-December, with bonds and gold up. According to Deutsche Bank, 93% of financial markets went down last year which was the worst result in 117 years. After a good start, 2018 turned out to be a shocker, but without a 2008 type crisis to pin the blame on. With hindsight, those who analyse companies and macro-economic trends did a respectable job forecasting strong corporate earnings growth and generally healthy economies. Inflation failed to be a serious problem which meant that central bankers could guide and occasionally act without causing much trouble. Some blame can be attributed to the politicians, but markets tend to focus more on money matters which means that something else must have stifled the long upswing which can be traced back to March 2009. The most likely culprit is the transition from quantitative easing to quantitative tightening. As liquidity was drained from the financial system asset prices were simply de-rated. It looks as if the QE hangover will take a while to get over.

Turning to this year, the major issues that dominated markets last year are as unresolved now as they were a month ago. The US Federal Reserve may or may not increase interest rates by too much this year. The US/China trade war may escalate or perhaps not and the Chinese domestic economy may be more fragile than previously thought. Having spent much of the last month reading well considered, weighty tomes churned out by forecasters it is clear that all have opinions, but none can claim any special insight. Day by day, investors will ponder on these issues, gleaning information from many sources as they search for certainty. Flexibility will be at a premium in 2019 particularly for UK investors where Brexit is playing merry hell with everything. We can’t even celebrate good manufacturing numbers, because they may have been inflated by stock piling ahead of supply chain chaos in March. None of this should be taken as a reason to hide until it’s safe to come out. Last Friday showed that known uncertainties can be temporary. The merest hint of an attempt by the Chinese government to stimulate growth and better than expected US employment numbers were good enough to push the US market up by over 3%.

So far, so conventional, but the other day I was asked about what could turn the setback of last year into a proper bear market. Straying into the unknown is little more than guesswork, but past experience shows that quite often there are warning signs for those prepared to look. In no particular order, the transition away from low interest rates and quantitative easing is exposing those who have been taking excessive risk. A major fund failure or even another Madoff would not be good news. ETFs are a low cost way of investing in a whole range of markets and sectors, both major and minor. A mismatch between promised daily liquidity and that of the underlying asset class could be contagious. Fragmented global institutions uncertain about  US support, may be less capable of dealing with crises than in the past. Russian adventurism in Eastern Europe perhaps. For those with imagination the list goes on, but an important rule of investment is to keep back pocket concerns firmly in the back pocket unless needed.

At the other end of the spectrum there are many reasons to be optimistic even if these don’t make it into the forecasters’ reports. It remains a bull market for innovation and invention. From a world traveller and Diary reader is news from Singapore that gladdens the heart. Apparently the economy is now being managed on a 50 year plan, because 25 years was considered too short term. Education remains a priority along with a strategy to attract skilled migrants. Vertical farms, desalination plants and extensive reservoirs are part of the plan to make Singapore virtually self-sufficient despite its small size and lack of resources. More in the present, there are plans for drone infrastructure using office and apartment block roofs as landing pads, whilst Changi Airport Terminal 5 is under construction, with the timetable for completion dependent on regional economic activity rather than inadequate project management.

Hello 2019.

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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