DIARY OF A FUND MANAGER - E&OE - 21.10.19

In this week’s Diary the practicalities of investing for life after Brexit, what it takes to be in business for over 200 years, disclaimer inflation and why demonstrations and strikes may become more prevalent after decades in hibernation.

In a week of waiting for events to reach conclusions, most financial markets ended little changed. In contrast, the UK was an oasis of action with sterling up and leading equities down. Traders closed short positions ahead of the parliamentary vote, but seemed unwilling to go any further. Sidelines can be attractive places to hide at times of binary uncertainty.

Broadly speaking it was business as usual for the global economy. The run of statistics implied that the slowdown continues. Singapore exports, Japanese consumer spending, Chinese economic growth, US industrial production and housing statistics, all moved lower.  Company results have started to come in, but it is still too early to generalise other than to note that those most closely linked to economic activity, such as Alcoa and Union Pacific, confirmed the downtrend. Over the next few weeks we will hear a lot more from the corporate world.

Stories about the substance of the likely trade deal between the US and China verged on the pathetic. A few vague promises from the Chinese seem sufficient to satisfy the Americans. Whatever is said at presidential election rallies, China is ahead on points as round one comes to a close. The debate in the House of Commons on Saturday preoccupied many, but those hoping for a decisive outcome were disappointed. Order, counter order and confusion remain the order of the day. The sight of government ministers tiptoeing through the minefield of constitutional convention, let alone the law is unedifying and one that does little to enhance the reputation of the UK as a safe place to do business.

UK listed property may have been the best performing asset class over the last month, but out in the real world conditions remain very tough. Rental income is under threat, asset values are untested by actual transactions and those willing to sign long leases are in short supply. The knock on effect of the WeWork implosion continues to reverberate around the system.

The problem for those of us investing in UK equities at the moment is not just the volatility of sterling, but even more importantly how to turn ideas into action. A no deal Brexit leading to a weaker pound is fairly straightforward. Many of the largest most liquid FTSE 100 companies are very international and have relatively little exposure to the domestic economy. Medium sized and smaller companies are more closely linked to what happens here, but finding suitable candidates for investment and then being able to ‘deal in size’ is far harder. In other words sterling may be a binary decision based on what form Brexit takes, but at a stock level the challenges associated with an orderly exit are, perhaps counter intuitively, greater.

Comparisons with 1992 when the pound left the Exchange Rate Mechanism and as a consequence fell sharply are of only limited value because then, unlike now, the FTSE 100 Index then was a fair representation of UK plc. In the intervening years takeovers have transferred the ownership of many that might have benefitted from a strong pound and a more vibrant domestic economy into foreign hands.

Threading my way through Extinction Rebellion protests, two meetings provided insights for further reflection. Visiting a privately owned engineering company that was founded in 1740 just as the industrial revolution was getting going highlighted how important it is for businesses to change when change is necessary, rather than change for the sake of change and also why a strong balance sheet never goes entirely out of fashion. Multi-generational family businesses are an under recognised asset of the British economy.

The other jaunt away from my desk took me to a discussion between Ed Miliband who only a few years ago was not many votes short of becoming Prime Minister and serial activist and author Naomi Klein. The main topic of conversation was how to accelerate change in order to reverse rising temperatures and reduce wealth inequality.

Having wandered into this gathering, far removed from my normal area of operation, I tried to keep a low profile, but soon realised that my cover had been blown when those around me noticed that I was sipping water from a plastic bottle picked up earlier when waiting for an opticians appointment. Having hidden it under my seat I turned my attention to the discussion which was timely, interesting and thought provoking. The key points that I noted were;

  • Policies to reduce carbon emissions and wealth inequality should be joined at the hip. It was acknowledged that this is easier said than done.

                                                                                 

  • Trying to build any sort of consensus across the political divide was impossible despite best efforts over many years.

 

  • Hence, direct action such as the demonstrations seen in central London over the last couple of weeks were necessary and we should expect more. Changing public opinion is hard, but this is the route to changing government priorities.

 

  • Industrial action will be about morality and not just money. The recent strike at Google about climate change is the shape of things to come.

Financial markets are a clearing house for ideas and are definitely not a safe zone for those seeking the company of likeminded individuals and conventional thinking.  As I’ve said, much to reflect on for those striving to see the future whether out of curiosity or through an investment lens.

And finally I have discovered another pocket of unreported inflation which ranks alongside the increase in the number of emoji’s since the first one appeared in 1999. Last week whilst reading a six page research note from BNY Mellon, I noticed that the accompanying disclaimer stretched to 61 pages. It isn’t that long ago that stockbrokers research notes ended with E&OE which stood for errors and omissions excepted.

Now back to the Donald and Boris show.

Written by

David Miller
Investment Director

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