Fund Management Diary

Transcription

1 Fund Management Diary Meeting held on 28 February 2017 The Dawning of the Age of Aquarius A year ago, as stock markets plunged following the move by central banks to negative interest rates, we commented that the policy was crossing the Rubicon and encouraged our readers to cheer up, as spring is coming. We were particularly identifying that the super cycle had run its course, with an end to the bull market in bonds with the commencement of the upturn in equities and commodities. We referred clients to the Kondratieff cycle, which we have published from time to time and has proved remarkably accurate (see diary 4 th October 2016). It is therefore somewhat surprising to hear the speeches from the likes of Tony Blair and John Major, who at the time of the Brexit referendum forecast disaster if the were to leave the EU, had been confounded by the subsequent strength of the economy. Yesterday s report by the leading global accountancy firm PwC found the surprising results of the EU referendum and the US election have calmed investors when compared with the preceding uncertainties. With the survey showing that 89% of Chief Executives stating they were confident about the business outlook for the next 12 months. It also found that London was perceived as the second most important city for growth prospects over the next year, behind New York, with investment analysts stating that they were very confident about global economic growth, but cited geopolitical uncertainties; with protectionism, the future of the Eurozone, social instability and cyber-attacks as the main threats. The report gave a high ranking to the, particularly in the technology and financial sectors, which was only surpassed by the US and China. In the eyes of investors and business executives, the is now equal with Germany, Brexit not having weighed on the country s international business standing. Meanwhile, all the signs are that there are growing risks to the Euro project with a political upset in either France or Italy likely to set off a serious run on the Euro, with both debtors and creditors in various countries discovering the true nature of the Euro project. There are serious possibilities now of a Marine Le Pen victory in the French presidential elections and with four populist Italian parties having almost half the seats in the parliament and a ruling democratic party facing splinters internally, there is a real chance that the President of the Republic will have to call an election. Both these incidents could result in majority parties who now wish to withdraw their currencies from the Euro, with the resulting upheaval likely to make Brexit seem like a walk in the park. The Euro is built around the Target 2 system which is designed to adjust accounts automatically between the various central banks of the ECB family. From an article in Thursday s (23 rd Feb) Daily Telegraph, Business section, they have calculated that Italy would owe 364bn to the ECB, Spain having liabilities of 328bn with Portugal and Greece at around 72bn. However the greatest surprise comes from Luxembourg, reflecting its role as a financial hub which currently would owe 350% of its GDP to private counterparties. Settlements would be required within the procedures and therefore it s not surprising that Germany has credits of 795bn. The Telegraph quotes that the EMU system has been built on sand and states that the bookmakers are offering 3 to 1 odds on the Front National (Marine Le Pen s party) restoring the Franc. The consequences of such an outcome are unthinkable.

2 The principle reason for the Eurozone problems solely lies with the mismatch in their balance of payments and current account liabilities, with this being highlighted by Germany s recently announced surplus of 8% in This has been commented on continually in our diaries and has been supported by leading German economists, with the an Council warning that this is well above permitted levels. However this seems to fall on deaf ears despite numerous calls for Germany to relax fiscal policy to take pressure off the other members. Added to this, if Greece doesn t receive a further bailout by July, it will be totally bankrupt. Again, the Germans are insisting on IMF participation, a 3.5% primary surplus and further austerity measures including cuts to pensions. The an Union expects a further fudge to be the outcome despite the damage being done, which is now being highlighted in Portugal and Spain, who are suffering high unemployment while they endeavour to meet their austerity targets. The damage being done has marked similarities with the Stockholm Syndrome, where a kidnap victim becomes beholden to their oppressor as the means of salvation. In the end, a weak currency which is favouring the most powerful country within the union must eventually be corrected, and in the words of Roger Bootle countries as different as Italy, France and Greece together with Germany; do not belong in a currency union. All the above should underline to investors the risk associated with sovereign bonds particularly from countries who may readopt national currencies. This has been anticipated to the extent that in January 2013, the EU restructured bonds with a Collective Action Clause (CAC), allowing for a reconstruction if a majority of 75% of bond holders vote accordingly which was designed to avoid a spivvy hedge fund profiting by refusing to take a haircut, as occurred in Argentina. However, in the article by John Dizard in yesterday s Financial Times, he stated that this would be delusional due to the collateral value attached to the bond(s) which are utilised by retail banks to meet their liquidity and reserve requirements. All this is even more significant given that today it was announced that the merger between the LSE and Deutsche Boerse has been derailed by Brussels who demanded that the LSE should sell MTS, an Italian bond trading platform, having already looked to sell their French unit LCH to address the competition issue. In addition the EU wanted the domicile to be in Frankfurt, despite the original agreement having been London. This makes little sense as the combined organisations provided the liquidity needed for clearing business to operate. In this aspect Deutsche Boerse would have been the junior partner and the LSE had proposed a regulatory bridge between the companies and in addition each clearing house would become a member of the other, providing back to back arrangements. This was not agreed by the Brussels bureaucracy despite euro clearing and derivative trading being essential, especially in the event of potential currency disruptions. As the leaves the EU, the an commission are well aware that this gives them a considerable hole in their budget, particularly with commitments to countries who have recently joined. However, the hard line being taken by the commission to impose an unrealistic monetary divorce settlement will only achieve the opposite effect! The has a strong bargaining position as can be seen from the themes set out in this diary. Theresa May has made it clear that we are in a position to help the an Union, particularly if the negotiations provide a strong mutual bilateral outcome for both parties. A large number of countries within the EU wish to participate in this strategy and it is to be hoped that they will overrule the current position being taken by the an commission.

3 Strategy Following the Trump election and Brexit, Anglo-Saxon economies are now committing to fiscal measures which favour investing in real assets. We remain overweight in the value class of equities, with a preference towards those providing earnings and dividend growth. Our caution in bonds has been rewarded and in this area we are continuing to favour specialist funds. Providence The SLI an Equity Income fund has improved relative to the sector over the course of the week. The team will continue to monitor performance going forward but no changes are expected at present. The bond allocation has weakened slightly given the fall in yields over the previous week, but this is a long term allocation that the committee are not looking to change in the short term. Equity Income 41% Bonds 31% Other 2% 5% 15% Select The fund is currently invested in line with our themes and therefore there are no changes expected at present. 12% 11% Equity Income 20% 20% Bonds 13% 10%

4 International The Market holdings have a value emphasis and while performing strongly, are below sector returns, the team will monitor them closely over the coming weeks. Reallocations are currently being discussed but nothing has been identified as suitable as of yet. 3 12% 4% 10% 1 15% Japan Venture The Market holdings have performed strongly but have a value emphasis and are behind the sector, with the exception of the JPM Income fund. This appears to be mostly as a result of underweights to China which has performed well in the short term. No changes are expected at present but the team will continue to monitor this trend. Specialist 8% 35% Other 5% 28%

5 Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. Issued by Margetts Fund Management Ltd Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority For any information about the company or for a copy of the company's Terms of Business, please contact the company on or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can us at admin@margetts.com