Commentary July 2016

Transcription

1 Macro A call for a more inclusive society, infrastructure projects brought to the fore and floatation of the idea of workers representatives on UK corporate boards coming from a newly installed Tory prime Minister at a time when two thirds of the Shadow Labour Cabinet had just resigned. It would have been hard to make this up whilst keeping a straight face! In the US we had the equally astounding pledge from JP Morgan CEO Jamie Dimon (somewhat encouraged by impending legislation) that US bank teller and customer service staff would be given pay rises of between 18% and 62% over the next three years. A pay increase is the right thing to do. Wages for many Americans have gone nowhere for too long. Just the sort of comment we are used to hearing from those groomed on Wall Street! Mr Bernanke and Mr Draghi have each warned that there is a limit to what Central Banks can do and it is now time for politicians to act. Act they now will if they want to keep their jobs (or even their political system, in some cases). This is a quote from our June 2012 Commentary. Unfortunately politicians have not been judged to have done quite enough, especially in Europe and the UK where the former has been irrevocably changed whilst we have seen our Prime Minister fall and Opposition ruined. The US election, meanwhile, is being contested by the least popular (Trump) and second least popular candidate (Clinton) in history whilst France, the US and UK have recoiled from politically motivated gunfire since our last Commentary. Blackrock joined the growing list of financial institutions in advocating more fiscal stimulus directly into world economies as there is a groundswell of opinion that Central Banks are even closer to the limit of their powers. This is a volte force for those at the epicentre of capitalism and small government. The sea change in politics has now reached tipping point, with the final push being applied by Brexit. If democratic governments want to stay in power they will need to ensure the majority of their voters perceive them to be doing more to bolster the economy. This will inevitably lead to an increase in inflation down the line, albeit the exact timing is not certain. Populists in Spain, Ireland, Holland and France have already asked for their own referendums post Brexit.

2 Page 2 of 6 In Japan Abe promised further stimuli within 24 hours of winning the Upper House elections although the Spanish election result was seen as a backlash to Brexit with the more conservative incumbents winning more seats than expected in their election success. With Elections, Referendums, Coups and violence grabbing the headlines it is hard to remember that the wheels of commerce are still turning (albeit more slowly in some regions) and markets functioning. The best news has come out of the US which, as we expected, has clearly accelerated from the slumber of the prior six months. This should continue through the summer and then slow somewhat as winter approaches (thus continuing the trend of the last few years). Consumer spending, Purchasing Managers Surveys and Consumer Confidence all signal an upturn. The main point worth watching is that despite the comeback in June, several indicators of employment have weakened most of the year. This includes the Fed s own employment conditions index which in May declined the most since 2009 and had the prior 2 months revised down sharply too. We hope this will wash out at monthly gains going forward approaching a still respectable 150,000 per month versus the heady 200,000+ we enjoyed last year. We will obviously monitor closely. Economic strength has not been as evident outside the US although Europe has not seen much of a fall off after a decent first quarter. German Industrial Production did fall unexpectedly in June but ZEW Investor Confidence has been remarkably resilient. Here in the UK construction and Business Confidence surveys point to an abrupt deceleration having already begun. Markets UK gilts have been the star performing asset class since our last Commentary as some investors view them (along with US Treasuries) as offering the unusual combination of being considered a safe asset whilst offering a positive yield. Brexit was the trigger for the yield collapse below 1% but it should be noted that across the globe the actuality or hope of continued easing has helped bonds outperform equities all year. Amidst heightened investor anxiety the US Dollar and Yen performed their traditional roles of safe havens whilst Sterling weakened dramatically across the board as investors have moved to price in a UK recession and accompanying Bank of England response. It is no surprise then, that in this environment commodities relapsed a bit after their dramatic rebound off the February lows (although commodity related equities have not fared too badly). Amidst equities the FTSE 100 has done a Leicester City and come out on top against all the odds (due to the fact 70% of profits come from overseas) whilst Hong Kong, another market investors love to hate, came out strongly too. The more domestic facing mid cap 250 is actually down over the period with banks and homebuilders tumbling by at least a quarter in the first couple of trading sessions post the EU referendum.

3 Page 3 of 6 Europe and Japan were the laggards. The latter suffers inversely to the strength of their currency, whose recent gain was ill timed given domestic weakness. Europe is not just a victim of Brexit but of rules for banks which were introduced post the Spanish and Irish bailouts to prevent governments helping rescue banks unless some bond holders first incur significant losses. This is severely impacting efforts to sort out the mess that is the Italian banking system. Matters have not been helped this week by a European Court of Justice finding which confounded consensus by failing to overrule the EU's stance. Mrs Merkel for one is still optimistic a solution can be found. Do we all like fudge? The table below depicts the movement in key asset classes since our last meeting on May 26 th and the close on July 18 th 2016: S&P % Hang Seng +5.3% $:EURO +1.1% FTSE % NIKKEI % $: +9.5% CAC % EURO: +8.5% US 10 Year Bond Yield -24 basis points DAX % Yen: +12.2% Brent Oil -5.8% Activity, Positioning & Outlook UK 10 Year Government Gilt Yields -60 basis points The main action of note was the significant reduction in our exposure to Continental European Equities despite poor performance from the asset class. Rather unsurprisingly we prefer to buy low and sell high, but there were two reasons for this action. Firstly, the existential threat to Europe has now risen considerably and the risk to French and Southern European stocks is that one day they get redenominated into their domestic currencies, despite the best intentions of the European elite. The other reason is that as UK based investors we have been bailed out to some extent by Sterling weakness and I think the Euro is now overvalued versus Sterling, despite their better current account situation than the UK. I recycled some of the money into a hedged class of an existing European holding - a fund which has a focus on quality and tends to hold up better in tough times. For some clients I also added to Japanese equities, after they declined precipitously, in anticipation of significant stimulus from the government and Bank of Japan. The other meaningful move was to switch some outperforming strong dollar beneficiaries in the UK and Asia into a purer play US fund which offers diverse exposure to a portfolio of American stocks which provide above average and growing yields yet trade, as a group, on below the P/E ratio of the funds we financed the purchase with.

4 Page 4 of 6 The table below illustrates the changes we have enacted to our Harpsden Portfolio Strategies since our Commentary in May 2016: 90% Equity Growth Income & Growth Income Ethical 2 % Smith & Williamson Gold & Resources 8.5% Invesco Perpetual Euro 1.5% Smith & Williamson Gold & Resources 1.5% ishares DJ Euro 1.5% Investec All China 3% Franklin Templeton UK 9% Invesco Perpetual European 1% Smith & Williamson Gold & Resources 2% ishares DJ Euro 3% Franklin Templeton UK 1.5% Investec All China 2% Schroder Asian Income Maximiser 2% RWC Nissay Japan 6% Invesco Perpetual Euro 5% Franklin Templeton UK 2% Schroder Asian Income Maximiser 1.5% ishares DJ Euro 16.5% ishares DJ Euro 7% First Trust US Equity Inc 7% First Trust Global US Equity ETF 2% Blackrock Continental Euro Equity Hedged 2% JO Hambro Japan Hedged 2% Blackrock Continental Euro Equity Hedged 7% First Trust Global US Equity ETF 3% JO Hambro Japan Hedged 7% First Trust Global US Equity ETF 5% Unicorn Ethical UK Equity Income There were no trades in the 0-35% Equity Strategy This year has already been tumultuous (yet profitable) for investors and two way volatility looks set to continue as political manoeuvrings are only going to increase as the election season hits peak time and Brexit negotiations begin in earnest. The upside thrust will come from the fact Central Banks are doing their utmost (perhaps too much?) to keep the global economic show on the road whilst politicians across the developed world have been given a rude awakening to the fact economic growth has to benefit the majority of the voting population and not just a wealthy minority. This will undoubtedly lead to more fiscal stimulus. History tells us this will ultimately lead to higher inflation but I will be surprised if in the short to medium term it doesn't first produce bouts of investor euphoria (except amongst sovereign bond investors).

5 Page 5 of 6 I have been wrong on sovereign bonds for two years now as yields have plummeted to levels not experienced in the last three hundred years despite this timespan encapsulating several periods where both economic growth and inflation have been much lower than what the world is currently experiencing. I will therefore conclude with a quote from the venerable Jim Grant in the latest edition of The Interest Rate Observer "The notion that negative yielding bonds, denominated in a fiat currency, are a "safe" asset is a misconception that belongs in the next edition of "Extraordinary Popular Delusions and the Madness of Crowds". We are bearish on bonds especially those that, like a new car coming off of a dealer's lot, positively guarantee the owner a loss as soon as he takes possession of his property. As I couldn't have put it any better myself I didn't even try! So we will remain vigilant and opportunistic in our quest to deliver real absolute returns over time whilst keeping enough cash on hand to provide both ballast and ammunition during severe down drafts. Enjoy the summer Ian N Brady Chief Investment Officer 22 nd July 2016

6 Page 6 of 6 Current Asset Allocation Asset class 90% Equity Growth Strategy Income & Growth Strategy Income Strategy 0% to 35% Equity Ethical Strategy Property Cash/Dollars/Euro 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 a fund invests in overseas markets, currency 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. This article is not intended as individual advice. If you require advice or further information please contact us.