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Diary of a fund manager - Rich Tapestry - 28.01.19

David Miller, Investment Director, Quilter Cheviot

This week’s Diary is mainly a collection of miscellaneous and unrelated bits of information which in aggregate are useful indicators of confidence and change. Also, news from Barcelona and Finland.

In a trading week of no defining moments, equities drifted higher except for the UK, bonds were in demand and gold was unchanged. Sterling had a good week as statements and rumours combined to imply that a ‘no deal’ Brexit was becoming less likely. Banks are far more tightly regulated than ten years ago and the consensus is that they are no longer a source of financial instability. It was, therefore, interesting to learn that Metro Bank had misunderstood the rules and did not have sufficient capital to satisfy the regulators. German manufacturing output fell for the first time in four years and in aging Italy the retirement age was reduced from 67 to 62. Let the children pay seems to be a vote winner. Back in the UK both Sony and Dyson moved their HQs. Sony to the Netherlands and Dyson to Singapore. Brexit or not, the facts of the matter are that global businesses make decisions based on a huge range of factors. Dyson’s turnover in the UK is now only 4% of the total. The World Economic Forum in Davos struggled for attention as ‘star’ politicians stayed away. Increasingly, the world seems to have stopped listening to experts. Two headlines are early additions to the 2019 list of unintended irony. ‘Beijing crack down on Marxist students’ and closer to home, ‘Brussels takes lead with AI regulation.’ As the Mark Baum character says in the film of The Big Short: ‘good luck with that’. The intonation is important.

A perennial question is whether or not there is too much debt. As credit is a key part of the engine of growth and as debt has been going up for centuries that is a hard one to answer. Debt only becomes a problem if there isn’t enough growth or if you can’t borrow new money to pay interest or repay lenders. In a report about other things was the statistic that there is around $3.3 trillion base money, while total dollar denominated global debt exceeds $90 trillion. Small changes in US monetary policy can make a big difference. Stop the press news over the weekend is that the US government shutdown has ended without an agreement to fund the Mexican wall. Another deletion from the December worry list.

Given all that is going on in the UK at the moment it is worth considering whether political instability has long term consequences. In 1980 and 1995 Quebec voted, by small margins, against independence from Canada. Despite no change, the financial centre of Canada has steadily shifted from Montreal to Toronto during this period. Aiming away from unnecessary risk is part of business management. In conversation with a specialist property investor based in Barcelona and Madrid, an obvious question was to ask about the impact of the Catalan independence vote in the Autumn of 2017. Large demonstrations in the streets, politicians arrested and elderly voters beaten by police; at the time it didn’t look good. For about eight months the Barcelona property market froze, but memories fade fast and major investors returned with enthusiasm only a few months later. It is too early to say whether Barcelona will experience a ‘Montreal’ effect, but if there is it will be more to do with regional taxation differences than fear of political instability. It takes a lot to stem the tide of globalisation or the impact of technological change.

And so to Finland for my third visit in two years and the first in winter. January days may be short, but bright milky sunshine and fresh snow more than make up for minus 11 degrees centigrade. Finland is a fully signed up member of the EU, but isn’t in NATO. Given that the distance between the border and St Petersburg is only 250 miles, neutrality is understandable. Business confidence is good, but an EU recession emanating from Germany would be a concern. Conversations about Brexit were supportive as opposed to hostile, but the impression of ‘good luck with that’ was hard to hide despite the unwavering politeness of all who I met. I should also report that the local food was excellent; blinis in season, pike, a welcome first for me, and reindeer which is really delicious.

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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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