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Diary of a fund manager - Mighty Oaks - 13.05.19

David Miller, Investment Director, Quilter Cheviot

From Trumpland to China, then to the British countryside via India, this week’s Diary tours the world before ending up back at home.

‘Just when you thought it was safe to go back in the water’ a classic Trumpian tweet emerged from the depths. For several months investors, including me, had been complacently assuming that the US and China would come to a face saving trade agreement with both sides able to declare victory. Then in 280 words it was all change. Only time will tell whether this latest twist is a sophisticated negotiating tactic, part of a longer term strategy, or incompetence. Markets reacted as expected with equities down several percent, government bonds up, gold higher and the dollar stronger than the rest.

We have been here before and second time around it feels slightly different. Unlike last December we now know that the US Fed won’t be increasing interest rates irrespective of global events which is probably why, so far, investors are underreacting. By this time tomorrow it might all be over once again, but if not then tariffs on Chinese imports into the US will most likely slow economic growth for both countries by a small amount and increase US inflation at the margin. The impact on business sentiment is the unknown and it could be argued that this hasn’t recovered from the events of last year even though stock markets have. Watch this space isn’t an abdication of responsibility rather a practical response to an unfortunate series of events.

In other news, BMW reported a 78% fall in first quarter earnings as it put aside a reserve to cover a potential EU antitrust fine, more than 50% of the constituents of the US inflation index are deflating, and Uber shares ended below the issue price on day one of its new life as a listed company. Feedback from readers of last week’s Diary was informative. From Japan the observation that the emphasis on form over substance must take some of the blame for decades of stagnation. Productivity is low because people work hard doing useless things. ‘It’s all about input, not output’. The observation that Tesla has created unanticipated value for itself in the carbon credit market drew comparisons with Ocado, which by licensing its operating platform to others has become much more than a grocery delivery business. There must be many more examples of unanticipated value for those prepared to look, of which more later.

Perhaps as an escape from Brexit I have recently been spending more time looking at the rest of the world, albeit from the safety of my desk in central London. Japan may be the 3rd largest economy in the world, but India is catching up rapidly. At the end of 2018 the IMF ranked India 7th, but only a few dollars smaller than the UK and France which are 5th and 6th respectively. Just to put things in an American context, California remains larger than all three. Talking to a fund manager visiting from Mumbai was enlightening. Western headlines tend to be about political discord, which is hardly surprising given that India is a thriving democracy, with military tensions on the border with Pakistan a further distraction. However, on the ground business is thriving. He made a credible case that India is in a 30 year secular upswing based on people power. Since January 1st 2000, 25% of all births in the world have been in India and so this is a young population where 65% are aged under 35. Providing products and services to a growing market is a powerful tailwind. Importantly, given trade tensions elsewhere, this is a domestic economy with only 20% of GDP export dependant. Companies like Apple and Samsung are building factories in India purely to meet domestic demand. Foreign investment is still needed, but that doesn’t seem to be a problem. The main external issue is the price of oil where demand has to be met through imports. Stability would be helpful. With a ‘we hold these truths to be self-evident’ smile he observed that 6-6.5% annual growth wouldn’t be a stretch and that by 2029 India’s economy will be 3rd behind the US and China. It was good to be in the presence of optimism.

Visiting clients far away from London, news that the British countryside is also global. If EU farm subsidies are lost then domestic equivalents have been promised, but the concern is that there might be a gap between the old and the new order which would cause cash flow problems for financially stretched farmers. Uncertainty is corrosive, but those in the business of food production are looking for solutions. For example, a lot of Welsh lamb is exported to France because consumers prefer it, but probably not enough to pay extra because of import taxes. In contrast we favour New Zealand lamb and so it wouldn’t be a great stretch to divert local produce to supermarket shelves if the price was right. Trade barriers are seldom insurmountable when it comes to matching supply and demand. Returning to carbon credits, land owners are discovering surpluses that businesses with deficits will want. Deals are there to be done to the benefit of all.

And finally a story of Anglo-French cooperation and perhaps even friendship. Rebuilding Notre-Dame will require money, craftsmanship and materials. During the Second World War most of France’s mature oak trees were felled which means that trees tall enough to construct the vaulted roof aren’t available. In contrast the British countryside has been managed for centuries and so we have a good supply of old oaks. Those who can are planning to ‘donate a tree for Notre-Dame’ which I rather like.               

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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