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Diary of a fund manager -Wild Exactitudes and Reality- 10.06.2019

David Miller, Investment Director, Quilter Cheviot

In this weeks’ Diary thoughts on why economic growth is helpful, but not vital when it comes to making a good return, being on the right side of change and why central banks matter. Also, comments about managing supply chains in the real world and some Scottish news. All while letting the train take the strain.

It was a better week for investors. Both equities and bonds moved higher as did gold. The dollar weakened by a fraction. There is at present a widening gulf between the contradictory signals coming from the world of commerce and the wild exactitudes of those seeking our votes. Economic growth was already slowing before the latest round of trade tension rhetoric, US employment growth has stalled over the last three months, German industrial production fell in May, UK manufacturing is now contracting for the first time in three years and Ford announced the closure of its engine factory in Bridgend. Arcadia has failed to persuade its landlords that rent cuts are vital if it is to survive. Negotiations continue. In contrast, companies on the right side of change are still doing very well as they take business away from those on the wrong side. Notably Alibaba, the Chinese equivalent of Amazon, which reported a 50% increase in revenue over the last 12 months. Technology conglomerate Tencent, which is often described as Facebook, Netflix and PayPal all rolled into one for the Chinese market, also reported vibrant numbers. These are domestic, rather than export focused, companies and so are less exposed to trade war issues.

Put on the spot during a live interview with CNBC I observed that bond and equity markets are sending out very different signals about the health of the global economy. Conventional analysis using traditional measures of value implies that US equites are assigning only a 10% probability that recession is imminent, whereas US Treasuries are flashing red at 90%. Which is right? Can both be right? Investors are making money so should they care? Questions, questions as always, but what is becoming clear despite the fog of uncertainty is that central banks are on the side of markets. The Bank of Japan is thinking about cutting interest rates to stimulate growth, the European Central Bank is on the same path and in the US, money markets are implying, with growing conviction, that interest rates are coming down. QE infinity beckons.

Supply chain experts are multiplying at an ever increasing rate, although whether any of those who opine about such matters have ever seen one in the wild is a matter of debate. When things change, business managers know that they have to find solutions. Contingency plans are made to cover the short term, but behind the scenes permanent solutions are being sought and will be implemented. Once these changes are made they don’t tend to be reversed even if there is a return to the way things were. Somewhat related, I was struck by a chart showing that the average speed of ocean going cargo vessels has fallen by 21% since 2008. At slower speeds it is easier to meet emission targets, thus avoiding the need to replace old engines. Longer delivery times are acceptable so long as they are predictable. Ship speeds also fell in the 1970s when OPEC first exerted its collective authority, oil prices multiplied by a factor of four. Talking with a now retired marine engineer I asked about the implications for the shipping industry at that time given that running costs must have been a lot higher than anticipated when contracts had been signed. His response was illuminating. ‘‘Well, if we were going to Asia from Europe, we would head out into the mid-Atlantic, turn south east to a point just off Cape Town, set the speed to only 10 knots, which uses a lot less fuel, and then sit back for a few weeks. Very boring, but we got there eventually.’’ Since then the Suez Canal has reopened cutting the journey time by weeks, but now we hear that the warming of the Arctic means that the northern route from Europe to Asia is getting closer to reality. That would be 10-15 days faster than traditional routes which take about 50 days.

A fortunate combination of meetings took me to Scotland for one and a half days last week. Thursday evening in Aberdeen was followed by Friday morning in Glasgow. Aberdeen sparkled in its own way, but the investment agenda was the same as everywhere else. Having said that, the weakness of the oil price is causing some problems for the local economy. As ever when I travel in the UK I was struck by the multi-national composition of those employed in the service industries. The hotel that I stayed in was run by eastern Europeans and three out of the four taxi drivers I met were from overseas. One was a charming Nigerian who had moved from Lagos to Aberdeen 39 years ago for a quieter life and stayed. The train journey to Glasgow the next morning hugged the coast for a while before crossing into central Scotland and, after the meeting, was followed by a late afternoon return to London, also by train. It was a rare chance to see a lot of the British countryside at ground level without the aggravation of motorway traffic. Give or take a few minutes I arrived at my various destinations on time and throughout remained connected to the world; markets monitored, decisions made, plans changed, questions asked and answered, all with great views for company. With practice I’m getting better at tuning out the ‘I’m on the train, where are you?’ conversations that seem to preoccupy so many during otherwise quiet moments.

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