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Diary of a fund manager - Public and Private - 12.08.2019

David Miller, Investment Director, Quilter Cheviot

In this week’s Diary, reflections on the longer term impact of zero interest rates on countries, markets and investors. Also, thoughts about the growing importance of private finance rather than public markets as a way of providing capital to growing companies. And finally, news from 2014.

It wasn’t a good week for those who crave stability. Equities and bonds went in opposite directions with share prices down across the board. Gold and the US dollar were preferred and the international value of sterling continued to decline. The reasons for all of this were hardly hiding in plain sight. Trumpian trade negotiating tactics continued to disturb investors, the Italian government became more dysfunctional and UK economic statistics showed the corrosive effect of uncertainty.

Cheap money is everywhere. Sixteen central banks have reduced interest rates so far this year, but all this seems to be doing is convincing investors that it’s going to be a long time before cash on deposit will once again provide a return. Government bond markets around the world are either offering a negative return or seem to be heading that way. US treasuries and gilts are in the minority by still providing a positive return, which is why both continue to attract buyers. The longer term impact of zero interest rates is a matter for conjecture with learned reports about the risk of Japanisation circulating. The consensus view is that the EU is flirting with a combination of no growth and no inflation which is where Japan has been for thirty years. In contrast, the US seems in the clear for now, whilst the emerging giants of India and China are vulnerable, but only second hand. Population size and population growth should see them through unless smart technology reduces the need for people as the primary generators of economic growth.

However much money you have to invest, earning a return involves taking risk. A world without risk would be a world without growth or innovation. A stagnant pond where there was a place for everything and everything in its place. That’s where equality of opportunity parts company with equality of outcome. To a first approximation, the more you have to invest, the more likely it is that you will have the resources necessary to make informed investment decisions. An important side effect of zero interest rates is that those who cannot afford advice will find it harder to make a return on their savings. To put it another way, and one that resonates with the language of populists politicians, non-elite investors will either be stuck with no return deposits or will take higher risks than they realise.

There is another change that is making it harder for the majority to make a return. Historically, stock markets have provided companies with access to development capital. This has worked particularly well in the UK and US, but less so in Germany where banks play a more important part. In the increasingly distant past, regional stock exchanges were ideal when it came to fund raising as companies progressed from small and successful to something bigger and more international. Investors knew what they were investing in and, at a local level, knew the people running the businesses. Shareholders shared in success and, of course, failure, but on balance even those with limited amounts of money had both knowledge and opportunity. Increasingly over the last few decades the local link has been broken and the same is now apparent at a country level. Understanding what a company like Unilever does and whether or not it is a good investment is complicated. Knowing that the local factory has moved from two shifts to three is no longer necessarily an indication that business is good.

Public stock markets are also under threat. Listing requirements are expensive and the associated scrutiny is not necessarily conducive to innovative, ambitious growth plans. The number quoted on stock exchanges has been declining for some years as companies find other ways to draw in the capital that they need. Private equity has become increasingly influential. The net effect of this is that growth is less readily accessible and instead remains concentrated in the hands of the founders and early venture capital investors. To do this sensibly requires even more resources than needed when investing in public markets. Assuming that these privately owned growth companies don’t sell to one of the multinationals, but do decide to gain a listing, this is quite often after the period of most rapid growth and so subsequent returns can be disappointing. I am sure that there will be further examples as the IPO (Initial Public Offering) schedule rolls out through the Autumn.

At an investment conference in November I have been asked to speak about the themes that have emerged since I started writing these Diaries. In preparation I am re-reading all, starting in January 2014. I have now made it as far as September. President Obama was in office, the coalition government in the UK was functioning, the Scottish referendum had delivered a no change result and Boris Johnson was Mayor of London and stuck on a zip wire. Candidate Trump had made a brief and insignificant appearance as preparations for the 2016 Presidential runoff between a Clinton and a Bush gathered pace. It all seems a long time ago.           

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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