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Diary of a fund manager - Ice and Fire - 17.12.18

David Miller, Investment Director, Quilter Cheviot

With 2018 almost done, this week’s Diary surveys the latest Brexit news, picks up on trends for the global economy and reflects on the prospects for 2019.

The penultimate five day week of the year brought some respite for markets. Equities ended mixed with the US down, bonds were stable, oil lower and gold unchanged. The dollar was top dog with sterling at the bottom. Pockets of good news failed to make an impression, but that doesn’t mean that they should be forgotten. Shipping charter rates are showing signs of life as scrappage exceeds new-builds. More generally, as quantitative easing moves into its final phase, failing business ventures run out of money leaving the survivors in a stronger position. Good companies are looking to buy cheap and bank lending departments are seeing a modest pick-up in activity. That’s the way markets turn, well, before optimism replaces pessimism.

All things considered, however, the news flow in recent days is pointing to a slowdown in global economic growth. A survey of US small businesses turned negative a few months ago and is still on a declining trend. Just about the only thing going up is pay. Disinflation, recession or stagflation are back on the agenda. The scene is being set for 2019 which has the potential to be lukewarm or distinctly icy. Time and data will tell.

The Great Fire of Brexit continues to lay waste to all before it. In just a few days, the vote by Parliament on the deal was delayed until the New Year, the Prime Minister survived a leadership challenge and the EU refused to make any concessions. Use of the word nebulous caused an undiplomatic loss of temper which lightened the mood. Guessing what will end this series of unfortunate events is beyond us all.

This year has certainly been memorable. Synchronised growth in January was infected by multiple attacks of dystopia. What looked like a solid foundation for investment turned into the first year since 1994, at least for US investors, when cash outperformed both equities and bonds. All this despite excellent corporate earnings growth. Those paid to predict the future are in a severe bear market along with a large number of hedge funds. In contrast those managing businesses and conventional investment portfolios make decisions on an incremental basis and so will always find things to do. Uncertainties have to be prioritised and decisions made. If we have a hard Brexit and if the effect on the UK economy is as dire as that predicted by the Governor of the Bank of England, will this be bad for UK equities or not? Analysing the sources of revenue of a well balanced portfolio of FTSE350 companies highlights that the performance of the domestic economy is less important than global growth. Contrarians looking to invest in a less than disastrous Brexit can find stocks where the yield and PE ratio are the same. Historically a good time to buy.

Talking through the issues and comparing notes with other market practitioners is never wasted. A long term investor in China, Russia and India had positive things to say about all three. The BRICs have become RICs in his mind. A conversation with a perceptive ‘hedgie’ who has made money this year is worth noting;

Him- Definitely looking forward to 2019.

Me- Why?

Him- A general belief that the arc of the investing universe is long, but it bends towards justice.

I certainly hope that he is right as there are a lot of ‘naked emperors’ strutting around just at the moment fuelled either by narcissism or money borrowed on the cheap. Sloppy assumptions do eventually die as the truth becomes unavoidable. These markets take a lot of thinking about and I can only hope that all the hard investment training put in during 2018 will pay off in 2019. Just as proved to be the case in John Irving’s splendid ‘A Prayer for Owen Meany’.

These Diaries are peppered with references to the books that I have been reading. Looking back at this year’s collection for stocking filler recommendations I was struck by an unplanned barbell combination of 19th/20th century novels about the way in which people lived. Middlemarch and A Dance to the Music of Time spring to mind, and the philosophising of Isaiah Berlin, Steven Pinker and John Gray. Perhaps the underlying theme was a subconscious attempt to put in place the foundations necessary to comprehend our distinctly strange present and as a leaping off point for the future which, after all, is where fund managers spend their day.

And as this is the last Diary of 2018, may I take this opportunity to wish you a Happy Christmas and a prosperous New Year. All being well, back in January.

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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