Fund Management Diary

Transcription

1 Fund Management Diary Meeting held on 7 June 2016 An Economic Black Zero At the recent meeting of the G7 held in Japan, Japanese Prime Minster Abe stated that the economic outlook is as grim as it was after the Lehman crisis in 2008, showing his fellow world leaders a series of alarming graphs illustrating current economic conditions with those of He was seeking to rally support for a global fiscal stimulus which rapidly met opposition from Angela Merkel the German Chancellor and more surprisingly, David Cameron the Prime Minister. While both agreed there should be a flexible approach they argued that each G70 country should tailor their own economic policies to their particular needs, both also favouring austerity over growth. Writing in today s FT, Peter Bofinger, a professor of economics at Wurzburg University, concludes that the German exception in macroeconomics is difficult to explain, as they read the same textbooks as economists in other countries. However, the philosophy is guided by Walter Eucken of the Freiburg School, who espoused open markets, private property and robust anti-trust policies, but rejected Keynesianism s fiscal expansion with full employment. His view was flexible prices and wages with an adequate monetary order, were a reliable antidote to market instability. He questions that such a narrow economic paradigm has survived for so long, but its success is a result of its size and extreme openness with its exports to GDP being 4 in contrast to 18% in Japan and 13% in the. This openness has allowed Germany to pursue passive macroeconomic policy at home and benefit from demand-side policies in other countries, with 60% of Germany s current account surplus being with the US, the, France and Italy, all of which have relatively high fiscal deficits. He believes that this approach becomes positively dangerous when applied in isolation to a very open economy to a large and not very open currency area like the Eurozone. Finally, in the present situation of chronic demand deficiency, insisting on the black zero for large currency areas, even at the global level, would create a black hole in the world economy. Into this mix has entered Mario Draghi, whose policy of doing whatever it takes has undoubtedly been at odds with the German philosophy and opposed almost at every step, despite many commentators believing that he provided the stimulus required in the dark hours of 2010/11, to rescue the Eurozone. His recent expansion of asset purchases under the QE scheme from 60bn to 80bn, which is now looking to buy AAA corporate bonds, given that liquidity in the sovereign bond area has almost dried up, has met ardent opposition from Germany, accusing him of destroying its savings industry. He in turn points to the recessionary influences within the Eurozone, particularly with many economists believing that France and Italy could be the next Euro economies to crash. However, in our diaries, we have also cautioned against the lack of liquidity in bond markets, which is hampering the ability to trade in these markets. It is our belief that fiscal stimulus would be preferable, at this stage, to further increases to unconventional monetary policy, for the reasons we have recently continually stated.

2 At the beginning of this year, the two potential big headwinds were set out as being an election of Donald Trump as President of the and a Brexit. However, as events unfold, there is a distinct possibility of both events occurring and we believe that each is arising from an increase in populism, with voters moving from the centre of politics both to the left and the right. In a recent issue of The Atlantic the writer Neil Gabler, author, critic and academic, quoted research showing that middle class Americans are living in more or less a continuous state of financial peril, which was supported by the non-partisan Pew Research Centre which had seen real (inflationadjusted) income fall steadily since the start of the century, with some 44% struggling to raise $400. This phenomenon is not confined to the and world economist Branko Milanovic in his book Global Inequality has illustrated the world population following a similar trend, which was alluded to in our previous diary, setting out the general disillusionment with the political classes. The nomination of Donald Trump as the Republican Presidential candidate testifies to the above trend, but this has been superseded by Hillary Clinton claiming the Democratic nomination with the support of super-delegates, who do not participate in the primary elections. Bernie Sanders, her rival, has stated that this is not democratic and will continue to campaign right through to the convention on the basis that super-delegates should respect democratic principles. We have witnessed broadcasts in which many of Bernie Sanders supporters categorically state they will not support Hillary Clinton in the Presidential election and would prefer Trump further testimony to populism as a powerful force in politics! This now brings us to Brexit and consensus now believes that the Leave campaign has won the immigration issue and while the Remain camp is confident that they hold the sway on the economy, in this respect with just over two weeks to go, they could be surprised by arguments being put forward by leading economists. Patrick Minford, in today s Telegraph, to an extent puts forward the Freiburg School v Keynesian argument, in which the, a relatively small country dealing with a large bloc like the EU, is hampered by the trade agreement with the EU. The bloc absorbs much of the output which is dominated by market prices, with the balance of trade being highly skewed against the. The EU agricultural and manufacturing prices are raised approximately 20% above world prices and therefore we sell into these markets at higher prices as the world competition cannot be undercut, which our consumers effectively pay for, with the being a lot worse off under the agreement. He believes that we would be better served on world markets, supplying and demanding goods at no special privilege and making agreements under WTO rules, where we already have substantial trading and would not be limited by EU rules imposing rules with whom we trade. Roger Bootle, also writing in the Telegraph, argues the same points, stating it has long been recognised that customs union, such as the EU can represent a move towards free trade, or a move away from it. Reducing tariffs between member countries promotes trade, but also diverts trade from countries outside the union to countries inside, with the great advantage being that we could now freely trade across the globe. He concludes that gains from enjoying tariff-free access to this bloc are likely to outweigh the losses from imposing the bloc s tariff on imports from the rest of the world the larger the customs union, the larger its share is likely to be of your total trade. In simple terms, the economic argument centres on the status quo and the future sustainability of the Eurozone. But in the end, the sovereignty issue could be the dominant factor.

3 Strategy Over the next six months, the headwinds of Brexit and a Trump Presidency will undoubtedly dominate financial markets and in this respect, we believe that the Margetts Risk Rated funds, which have a bias towards equities with earnings growth and dividends as a principal factor, retain a powerful default position. We continue to remain cautious with regard to bonds, especially as leading indicators are showing that commodities could be entering a bull market, which would certainly favour the and SE Asia. Providence The bond allocation within the Providence fund has been relatively weak due to the short duration focus, which has underperformed when compared to longer dated bonds. This is a reflection of the volatility in bond markets at the moment with yields rising and falling on a regular basis. We are looking to maintain our short duration focus in the portfolio as we believe that inflation will come through positively in the near future and interest rates are likely to increase from historic lows to reflect this change in cycle. Following the continued recovery in the oil price from January this year, the M&G Global Dividend fund has outperformed. There has been some volatility which has reflected changes in commodity markets, but we are pleased with the fund s contribution to the portfolio and the diversification the holding has given overall. Equity Income 39% Bonds 31% Other 5% 13% Select Small sells have been made to rebalance the equity weighting in the portfolio. The portfolio is currently invested in line with the Margetts themes with no changes expected at present. 12% Equity Income 20% Bonds 14% 19% 7%

4 International Small sells have been made from the an and Asian allocation to rebalance the equity weighting within the portfolio. The Legg Mason IF Martin Currie North American fund has shown some mild signs of recovery but remains relatively weak over the medium term. The team are currently completing research on prospective replacements which remains ongoing. No changes are expected to be made over the coming week. 12% 1% 3 9% 22% 15% Japan 5% Venture Sells have been made to rebalance the portfolio. There are no prospective changes as the investment committee feel that the portfolio is invested in line with the Margetts themes. The Asia and holdings have contributed positively to returns following a strong bounce back in performance from this region in recent months. Specialist Other 7% Asia Pacific 34% 30% Cash / Money 0%

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