Macro Overview. Harpsden Wealth Management Limited. Quarter One 2018 Commentary

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1 Macro Overview I was reminded by an ex-colleague recently that since joining the industry in the 1980 s, we have been brought up to generally ignore the politics and focus on the numbers. He added that it was extremely difficult to practise this at the moment. Since January we have had China enact constitutional change in order to endorse a President for life; a blip in Brexit negotiations; over 50% of Italians vote for anti establishment parties; Mr Abe, his wife and Finance Minister embroiled in a land and documentation scandal and, not least, President Trump finally enacting his Fiscal Stimulus and Tariff policies. The President has even agreed to go to North Korea for a chat (without flying over Iranian airspace)! We have also had some serious strike situations arise another throwback to the mid 80 s. Industrial production in Germany was held back in January due to the level of industrial action whilst Denmark is set for a General Strike on April 10 th if the government can t meet the union s demands for 8.2% wage growth over three years - they have offered 6.7%. The French, naturally, would not want to miss out on such a competition so a series of strikes have been planned in protest against Mr Macron s economic reforms. We said in January that we were in the as good as it gets camp and that investors were unlikely to be feeling as optimistic by November. An (inevitable) cooling in several economic numbers has already impinged upon optimism, as has the even more inevitable rise in financial asset volatility. As mentioned above, there have already been a few signs that the global economy is slowing from the above trend rate of the past few quarters. Examples include; US Retail Sales, European Industrial Production, Official Chinese Manufacturing PMI (but not the unofficial CAIXIN one), a UK Consumer Credit slowdown, and the Japanese Economy Watchers survey (which measures current mood of consumer servicing businesses) falling to a ten month low. However, the weather did have some impact and there are other numbers that are still strong such as Japanese Machinery Orders, US Consumer Confidence hitting a 14 year high, strong US job creation and EU unemployment falling to the lowest level since October As we have been saying for some time now, the absolute pace of the past few quarters was unsustainable and merely reflected a natural rebound from a deep global industrial slowdown and deflation which ran from Q to the summer of However, despite a likely slowdown, we highlighted in our Commentary from our recent US trip that wage inflation is finally starting to accelerate, primarily in the US but also to some extent in the UK and parts of Europe. Wages are up in Japan too but from a near zero starting point and only to 0.7%.

2 Page 2 of 6 This is at a time when many industrial companies are trying to pass on increases in input costs after several years of restraint. Therefore any further GDP growth at anything approaching trend is likely to further stimulate cost and price pressures on the economy. Markets Moves in markets and investor sentiment have been dramatic. In the week ending 19th January global equities garnered record inflows of $33billion whilst only two weeks later record outflows of $30.6 billion occurred! Blackrock noted that Mergers & Acquisition activity in the first three weeks of January was at the highest level since Bond markets, commodities and equities have all suffered and no geography has been spared since the January peak in markets. Only oil prices (but alas not oil shares), and the Hang Seng marginally, are up this quarter. The table below depicts the change in price of selected asset classes since close on 29 th December 2017 to close on 29 th March 2018: FTSE % Euro : -1.24% S&P % US $ : Euro -2.41% CAC % Yen : +2.10% DAX % US $ : -3.70% Hang Seng +0.58% UK 10 Year Gilt Yield + 16 basis points NIKKEI % US 10 Year Bond Yield + 34 basis points Brent Oil +3.71% All prices are in local currency. The rise in US interest rates has seen the 10 year yield reach or surpass most commentators year end targets, which were crowded round 2.75%. UK and European Yields moved up too but not so dramatically and have actually fallen back quite significantly of late. The decline in yields was coincidental with Brexit negotiators becoming bogged down, although causality cannot be proven. The oil price has been under pressure on near term supply increases in the US despite demand numbers being revised up. OPEC is now forecasting 1.66m barrels per day of extra supplies in 2018 (mostly from the US) versus 1.6m barrels per day of incremental demand. However, currently, excess inventories are being run down very quickly, there is virtually no growth outside the US and OPEC and other oil producers are being unnaturally disciplined. So, excluding a slowdown all the way to below trend for the global economy, we think oil prices can be sustained around the $60 level. Oil shares have been under a lot of pressure and have significantly lagged the improvement in the oil price since last summer. Investors don t seem to believe in the sustainability of higher oil prices nor the increased focus on returns from oil companies.

3 Page 3 of 6 Performance of US Oil and Gas ETF against West Texas Intermediate Oil The US dollar has not been as strong as one would have expected during a period which witnessed an increase in financial market volatility, an increase in political uncertainty and a widening of interest rate differentials between the US and the rest of the world. One reason is that it is very expensive to hedge US assets at the moment and another is likely due to the fact the US is increasing bond supply more than other countries. In fact it is interesting that the UK Chancellor is boasting about reducing the deficit in our slow growing economy at the same time the Americans are aggressively stimulating their faster growing one. Which country is pursuing the correct policy? The Euro has hung in there despite the Italian vote result (partly because Germany finally agreed on a less fiscally hawkish government coalition) and indeed Italian bond yields moved very little against their German counterparts. This is despite investor consensus that the yet to be formed coalition is likely to be less fiscally prudent and less docile when dealing with German demands to stay within EU guidelines. Activity, Positioning & Outlook We took some steps to reduce exposure to more volatile asset classes in late Q4 and early January but in the main still have a full weighting to equities. Furthermore, one of the volatility reducing strategies incurred more of a short term drawdown than we had been anticipating. However, this was due to the fact we had the largest two day spike in volatility (as per VIX index) in history. The way this strategy works means it automatically benefits from the contracts it writes during the spike so we are confident the losses will be recouped in the coming months. This process is already well underway.

4 Page 4 of 6 Likewise we continued our long held policy of putting some money back to work after a meaningful correction. However, we are doing this in a controlled manner (just as we reduced volatility in a controlled manner) as it is over ten years since we have been in a globally synchronised monetary tightening environment- indeed many investors have never witnessed one. The combination of this and the move to the strong man political environment virtually guarantees that volatility (in both directions, as we have said before) will remain at more elevated levels than witnessed in Europe and the UK need to join the US in having positive real interest rates for 10 Year Bonds/Gilts before we become interested in the Pan European Sovereign Bonds. We are a long way from there so capital losses remain our base case for the asset class. The tables below illustrate asset allocation trades in the period since 31 st December Harpsden Portfolio Strategy 90% Equity Growth Income & Growth Income Bought 6% JOHCM Japan 2.0% JOHCM Japan 3.0% JOHCM Japan 1.5% Artemis Income 1.5% JOHCM Japan 1.5% Schroder Euro Alpha Income 2.5% Allianz Structured Return 1.25% Woodford UK Equity Income 2.0% JOHCM Japan 4.0% JOHCM Japan 1.5% Artemis Income 1.5% JOHCM Japan 1.5% Schroder Euro Alpha Income 1.25% Allianz Structured Return 1.25% Woodford UK Equity Income 2.0% JOHCM Japan 1.5% Artemis Income 1.5 Schroder Euro Alpha Income 1.25% Woodford UK Equity Income 2% JOHCM Japan Sold 2.5% JOHCM Japan Hedged 6.0% JOHCM Japan Hedged 2.5% JOHCM Japan Hedged 3.0% JOHCM Japan Hedged 2.5% JOHCM Japan Hedged 4.0% JOHCM Japan Hedged Nil 0-35% Equity Nil Nil Ethical Nil Nil

5 Page 5 of 6 Conclusion The other point we need to note is that, as of the time of writing, no IA sector is making money year to date. Even though bonds have outperformed equities during the drawdown, they have still lost money as a lot of the concerns have emanated from rising interest rates. Property funds and commodities are also down. We will need to be even more diligent in the future in constructing a portfolio that can participate in up markets yet still provides at least some downside protection in tough times. Best Regards Ian Brady Chief Investment Officer

6 Current Asset Allocation Asset class 90% Equity Growth Strategy Income & Growth Strategy Income Strategy 0% to 35% Equity Ethical Strategy Property Cash/Dollars/ Fixed Interest High Yield Index Linked Corporate/Strategic Government Equities UK North America Europe Asia (excl Japan) Japan International Emerging Global Low Beta Energy Gold Absolute Return Total Important Information/Risk Factors: Past performance is not a guide to future performance and investment markets and conditions can change rapidly. Investments in equity markets will be more volatile than an investment in cash or fixed deposits. The value of your investment may go down as well as up. There is no guarantee you will get back the amount invested. If you fund invests in overseas markets, currents movements may affect both the income received and the capital value of your investment. If it invests in the shares of small companies, in emerging markets, or in a single country or sector, it may be less liquid and more volatile than a broadly diversified fund investing in developed equity markets. The views expressed herein should not be relied upon when making investment decisions. The article is not intended as individual advice and if you require advice or further information you should contact us.