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Diary of a Fund Manager - The Sound of Kicking Cans - 11.03.19

David Miller, Investment Director, Quilter Cheviot

Central banks are doing their best to de-stress the financial system. First the Fed and now the European Central Bank. This week’s Diary focuses on the latest news from central banks and, as Brexit approaches, how Switzerland has coped with 25 years of trade negotiations.

It was mostly a down week for investors. Equities drifted lower as did gold. Only bond markets came out ahead. The Brexit clock is ticking closer to midnight, but without any clear sense of what the new day will bring. Reports from the UK property sector reflect this uncertainty, whilst news from the high street was unremittingly gloomy. Debenhams, John Lewis, LK Bennett and Paperchase all made the headlines for the wrong reasons. Over in the US, February employment numbers were much lower than expected, but this could be because of the weather, the lag effect of the Government shutdown or none of the above.

The ECB joined the Fed with the admission that an inflationary boom is the least of its worries. We should no longer expect an interest rate rise this year, EU banks will continue to receive support when required and when bonds acquired during quantitative easing mature, the proceeds will be reinvested in longer dated securities. When the Fed announced its 180 degree change of direction, markets responded positively. Interestingly, this time around the reaction was more muted perhaps because of the realisation that after ten years of monetary support, growth is still anaemic and negative interest rates endemic. The good news for investors is that we now know that the major central banks will do all that they can to take the stress out of financial markets in order to avoid a repeat of what happened in the last few months of 2018. The can is being kicked down the road with enthusiasm.

Debating these matters and more with a US fund manager passing through London was enlightening. In his view the authorities have made the decision to focus on asset price stability, the default option since the credit crunch,  rather than grasp the nettle of wealth inequality. We also took the opportunity to address the issue of how much debt is too much. In summary, if you control the world’s reserve currency, which will remain the dollar for the foreseeable future, and if you have access to the printing presses, then you can continue to ‘QE your way out of trouble’. Given the gap between tax revenue and spending this is the only solution for the US. Eventually this strategy will fall over, but there are no immediate signs of this happening. Fortunately, disasters like Venezuela and Zimbabwe are few and far between.

As Brexit negotiations continue, references to the deals done by other countries with the EU make regular appearances; Norway and Canada usually with a plus added for good measure spring to mind. Less well publicised has been the experience of Switzerland which considered, but then rejected, joining the European Economic Area in 1992. The 50.3% to 49.7% referendum margin was wafer thin. Ever since there have been trade negotiations and, on an incremental basis, deals have been done. Compromise by the junior partner, Switzerland, has been the key to progress. If the UK adopts the Swiss model, then the Brexit deal being discussed at the moment is, to quote Churchill; ‘Not the end, it is not even the beginning of the end, but it is perhaps the end of the beginning.’

Despite uncertainty London is very busy at the moment and, as ever, has much to offer by way of distraction from the 24 hour news cycle. A trip to the Old Vic to see Arthur Millers, The American Clock, was perhaps a mistake, as its theme was the Depression. However, although a bit on the long side, the contrasts of light and shade kept the audience’s attention throughout. More obviously escapist was an evening at the Cadogan Hall being entertained by the excellent  Imperial College Symphony Orchestra. Unintended I’m sure, but the programme of Elgar, Shostakovich and Mahler provided something for all involved in the Brexit debate.

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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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