DIARY OF A FUND MANAGER - WELCOME TO HOTEL NEW ZEALAND 10.08.20

In this week’s Diary, news from Switzerland, New Zealand and the rest of the world, together with a few observations about the ‘dark art’ of fund management during times of change.
The major equity markets around the world had a good week, rising by between 2% and 3%. Gold was up by a similar amount, bonds were broadly unchanged, with the US dollar ending marginally higher. Although the news flow was mixed investors decided to be optimistic. These on/off mood swings have now been with us for a couple of months.
As the company results season rolls towards a conclusion there has been much to learn. US earnings in the second quarter were down 34% on average and banks are setting aside huge reserves in anticipation of an increase in loan defaults. Manufacturers are restarting production lines, although actual demand remains in doubt.
More broadly, employment levels are rising, but in the US 31 million, or 20% of the workforce, are still receiving some sort of unemployment benefit. I have never met a senior loan officer, but I am sure that they are very nice people. Unfortunately, and despite massive support by governments and central banks, they are reported to be tightening lending standards. Paying back debts will still be hard even when interest rates are low.
The world around us will look very different when we emerge from this crisis. Some well-known brands may not survive. Virgin Atlantic applied for Chapter 11 bankruptcy in the US last week, which means that it can carry on trading but doesn’t have to pay its creditors, In the UK, Pizza Express is closing a large number of restaurants so that the remainder have a chance of survival.
Elsewhere, a report from Morgan Stanley published last week contained the observation that despite the largest economic contraction on record, share prices are, on balance, unchanged this year, whilst bonds and house prices are significantly higher. Gold has become the new way of diversifying risk. Well we know this, but sometimes the obvious is still startling.
Portfolio construction is vital at all times, but particularly now as the future is anyone’s guess. Explaining why there is no right answer can be difficult. For example, the major US technology companies are where the growth is so why bother with anything else? With the focus of the increasingly nasty US/China trade war on the battle of the internet this one is relatively straightforward to answer.
Why own very low or negative yielding government bonds is much harder to justify, let alone zero income cash which will lose value even if inflation stays low for an extended period. If, however, low inflation turns into deflation then cash, probably US dollars, will be the place to be and after that long-dated government bonds. Justifying investment in areas that don’t appear to make sense may be hard, but in terms of risk control it is vital. A foot in several camps is common sense not indecision.
My week was the usual mix of listening, reading and talking, all of which helped to illuminate the uncertain future. The Swiss went back to the office in May and so the lockdown is already a distant memory. From a business owner based there the observation that the older members of his team, even those with health problems, have been more enthusiastic about back to normal than the youngsters. This is the opposite of what I expected. Also, that those with families were more happy to be at their desk than those who are single. Less surprisingly, the introverts long for a return to remote working. As ever sloppy assumptions about human behaviour are there to be challenged by reality.
More seriously for all of us as we reopen are the consequences of staying safe. New Zealand has managed to contain the virus and is regarded by many as a model of good government. News from a Diary reader based there highlights the challenges that are now faced. The country is in recession, retail space vacancies continue to rise, the pain is spreading to hotels, car rentals, catering and leisure. Pay cuts are a fact of life. The borders are closed to foreigners and even returning Kiwis are only allowed back with an appointment. Quarantine hotels are operating at full capacity.
Given that an estimated one million New Zealanders live elsewhere in the world, those wanting to return home could be in for a long wait. What they will do when they get there isn’t clear. Against the background of economic gloom, house prices are rising both because of demand and cheap mortgages. At some stage every country will need to strike a balance between health and safety and economic reality. Investors will be kept busy repricing the world as the consensus settles on the answer.
The second Diary of a Fund Manager Q&A session last week was as challenging as the first. Unscripted with live questions coming in from everywhere meant that, at least for me, the time allotted went very quickly. My colleague who was responsible for keeping the show on the road, listening to me and at the same time selecting the next question did the hard part. The marketing team is currently working on answers to questions we didn’t quite manage to cover and uploading the recording of the Q&A session to the Quilter Cheviot website for those interested.

Written by

David Miller

Investment Director

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Winner, Outstanding Achievement – City of London Wealth Management Awards 2016