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Diary of a fund manager - Survive and Thrive - 15.04.19

David Miller, Investment Director, Quilter Cheviot

This week’s Diary spans a particularly news-rich fortnight. Brexit of course, but the focus is mostly on the implications of how consumers are changing the world around us.

Despite two weeks of political drama and uncertainty in the UK, markets are little changed. That’s not the same as nothing has happened. Of note, investors oversubscribed a $10 billion Saudi bond issue by eight times and Debenhams went into administration. It is estimated that last year 2400 shops and 500 restaurants/pubs in the top 500 UK high streets closed.

All year markets have been travelling higher in hope despite poor economic news. Now we are seeing signs of stability in China and other regionally connected economies such as Korea and Taiwan. Importantly, the US is moving along at a reasonable pace, but Europe remains becalmed. Low interest rates and little sign of inflation make this a reasonable environment for both equities and bonds. Now for the second quarter of the year where the balance of too much or too little growth will continue to exercise the nerves of all those who follow financial markets. Expect more about Japanese style stagnation balanced by fears about inflation now that central banks are paying less attention to this particular risk. Students of economic history might like to note that in both the 19th and 20th centuries interest rates remained low for stretches of approximately 40 years. Place your bets for 2048.

Brexit has become Flexit as the exit deadline proved ever more flexible. Uncertainty will now continue until 31st October or perhaps earlier or perhaps later. Quite how this will affect the politics of the UK is hard to gauge, but for the moment, and only at the margin,  investors seem likely to move away from safe havens like gilts and potentially back into sterling. Equity markets will contain both winners and losers. The extent to which economic growth has been helped by stockpiling ahead of a ‘no deal exit’ will become apparent. Pricing risk is just a little harder than it was, but not impossible.

Away from all of this are the forces that will drive the future. Following his unamicable parting from WPP, where he turned a supermarket basket manufacturer called Wire and Plastic Products into one of the largest advertising agencies in the world, Sir Martin Sorrell is starting again with S4 Capital. An opportunity to attend the preliminary results meeting was too good an opportunity to miss. Observations and opinions rained down on the audience. Digital advertising is rapidly replacing traditional ways of influencing consumers as we change the way we consume. See above if you are in any doubt about the pace of change. Those who commission advertising campaigns are also changing, but are lagging behind. There is still too much spent on print adverts per minute of eyeball time and not enough online. Traditional campaigns, months in the planning and long lasting, are a thing of the past. Now the most effective strategy is to launch one campaign a week which includes agreeing the concept, filming and release. See what works and move on.

I did realise I was being sold a story by a professional, but it made sense and it is easy to remember S4’s strategy of ‘faster, better, cheaper’. If you are wondering who is doing this then all you need to know is that the content is provided by a team of 950 with an average age of 33, whilst 250 interact with the commissioning companies, average age 25. A different universe from the way that advertising was portrayed in Mad Men.

The combination of experience and willingness to change is powerful and so it was just as interesting when he went off message. For example; Coca-Cola bought Costa not just to cross sell products, but also to acquire Costa’s customer database. Having allowed Google and Facebook to own our personal information, conventional businesses are now fighting back. Who controls our data will be the big battle ground for the next few years, not trade wars about cars and steel. I have been unable to check the following factoid gem, but in the US there are 91 million small businesses (depending on definition) that only advertise on Facebook. Big or small, those businesses that adapt fastest will survive and thrive, whilst from an investors point of view there needs to be an acceptance that successful companies moments in the sun are likely to be short. Complacency will be a bad strategy as consumers continue to rule the roost. The one thing that does seem certain is that regulators will continue to fight the last war, not the next. Their chances of controlling change are limited.

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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