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Diary of a Fund Manager - Steady As She Goes- 02.12.19

In this week’s Diary, my final for 2019, thoughts on the rules of engagement for 2020 and the implications for investment.

As the last December of the second decade of the 21st century dawns there is a much to consider. Before that, it is worth reporting that last week was again a good one for investors, with equities ahead, bonds flat and the pound stronger across the board. Thanksgiving on Thursday followed by Black Friday reduced American involvement in markets. Unless anything untoward happens in the next few weeks, 2019 looks like being added to the all-time list of fine vintage years, something many still find hard to believe.

My week was filled with a lot of reading, punctuated by some important meetings and a couple of media appearances where the topic of conversation was anything but politics please. Despite the uncertainty created by the election and the general air of chaos emanating from Washington, the rules of engagement for 2020 are becoming clearer. To start with, central banks are showing no sign of being anything other than very supportive, ready to deliver lower interest rates and monetary support when required. Attempts have been made in previous economic cycles to reduce exuberance before absolutely necessary, but not this time I suspect. Slightly higher than planned, inflation is regarded as a price worth paying for growth.

An optimistic way to interpret market steadiness in the face of adversity is that the global economy is actually in good shape. Globalisation, growing wealth in many parts of the world, and boundless innovation have helped to create a far more robust structure than in the past. Of course there is too much debt, but if it is affordable then try not to worry too much.

There is plenty of talk at the moment about governments using taxpayers’ cheque book to stimulate growth, otherwise known as making adjustments to fiscal policy. Starting in Asia this is already happening, with China in the lead. This is also the direction of travel in the UK – irrespective of the election result. The US had benefitted from tax cuts earlier in the electoral cycle, but since then it has been hard to identify what exactly the various arms of state and federal government have in mind when it comes to spending. Austerity, however, is definitely not on the agenda. Only in Europe is the fiscal winter still in evidence, with Germany unwilling to experiment with pro-growth policies. On balance the fiscal score sheet is weighted to support.

All of which brings us to confidence. We are all human, I am pleased to say, and so susceptible to fears about what might go wrong in the future. Ask yourself the question, do I feel more confident than a few months ago? Collectively, the answer seems to be ‘yes, a little’, which suggests that if some of the potential worries fail to turn to reality then this is a trend that could grow in strength.

Turning to the practicalities of investment then, it is possible to draw some conclusions. Global equities look well placed to make further steady progress, although an emphasis on stock selection, liquidity and quality will remain important. Bond markets are unlikely to deliver a repeat of the excellent returns delivered this year, but seem far from collapse. Secure income remains valuable. Industrial commodities will be in demand, but given that supply and demand are in balance, returns could be limited. And finally, conventional safe havens like gold and the US dollar may be less in demand, although insurance policies should never be cancelled.

The bottom line is ‘steady as she goes’ with a strong dose of ‘there’s many a slip between the cup and lip’. If something lurking in the dark shadows of 2020 emerges into the daylight though, I’m sure we will find ways to cope.

Next week I will be in India for a long planned and much anticipated first visit. I am sure that there will be much to report on return even though this does mean missing the election. By the time I get back it will all be over and Christmas will be upon us.

Best wishes to all for a happy Christmas and prosperous new year.

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