FUND MANAGEMENT DIARY Meeting held on 12 September 2017

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1 Bubble Bubble, Toil and Trouble FUND MANAGEMENT DIARY Meeting held on 12 September 2017 As Hurricane Irma starts to clear Florida it is estimated it has caused a further $100bn in damages, added to the $120bn caused by Hurricane Harvey. In addition, this is now being followed by Hurricane Jose, although it has been downgraded to a Category 2 Hurricane and may miss the Caribbean, the likely landfall is on the US Eastern seaboard. The potential total hurricane damage in the short term is around $250bn. While the main losses will be borne by the insurance industry, this is less than expected and with premiums expected to rise significantly this has resulted in a bonanza in insurance shares. President Trump is looking for up to $50bn for emergency relief and has utilised the position to place leverage on Congress by combining with the Democrats to extend the debt ceiling through December, with negotiations starting in the first quarter of This has caused a major fall-out between the President and the Republican Party, which is coming to a head at a time when tax reforms, issues on immigration and healthcare reform are considered critical. Strangely, the Speaker of the House, Paul Ryan, and Majority Leader of the Senate, Mitch McConnell, who under the Obama regime were strong supporters of the aforementioned legislative changes, are now opposing President Trump, who made it clear that he intends to pursue these policies even if it means cutting deals with the Democrats to raise the $19.8tn debt ceiling. Congress had been looking to put major tax reform legislation, primarily for the low paid, before the White House, before the clock ran out, but Trump is looking to set up mandatory changes as he looks to divert back some of the estimated $4tn of earnings residing in offshore funds, mainly from large technology companies. He is planning to cut corporation tax from 35% to 20% and provide a measure of tax amnesty which is believed could cause at least $1tn of profits to return to the home market. This would trigger a major Wall Street rally with potential for a dollar storm, which would force the Federal Reserve to tighten and raise interest rates, in advance of its own planning to reduce its balance sheet. Leading economists believe that this would be a party compared with previous taper tantrums and could have an adverse effect on the Global economy, with Gillian Tett headlining her comment article in the FT Treasury Bill Jitters Laid Bare Investor Angst. It is now felt that the Republicans will delay major tax reforms in opposition to the President, but in view of the mid-term elections towards the end of 2018 they are fearful of losing their majorities. President Trump s popularity with the electorate is still strong and bookmakers retain him as the favourite to win the Presidency in It would appear that populism is very

2 much alive and that the political elite should be fearful, especially if it is seen that wages continue to be restricted while the rich get richer! There are undoubtedly changes ahead and it is important that political parties now look to compromise, which will best benefit the global economy. President Trump has made the point that in order to keep momentum going and truly allow the economy to take off, as it should, it is vital to reduce crushing tax burdens on our companies and our workers. In order to secure what is wanted, or anything like it the stimulus effect would need to turbo-charge a US economy already hitting labour shortages and capacity restraint. However, it is now up to the politicians and central banks to ensure that they are adopting policies which take into account the welfare of the people whom they represent. This now brings us to the effects of QE, which has driven economics and politics since 2008 and has been the main stimulus behind asset accumulation, as can be seen from previous remarks. The Fed is nearer to the point of reducing its balance sheet and is now aware that it could be tipped into action. However, Mario Draghi, at his meeting on Monday at the European Central Bank, put off any questions regarding winding down its QE programme. He has learnt through experience the importance of preparing the ground thoroughly and maintaining a fine line between reassuring investors and governments on how to exit from QE, while still retaining control over the timing. However, his stimuli have ensured the recovery of the European economy, but have resulted in an overly strong currency and inflation below his target. This is similar to the position of the Federal Reserve and the predicament of the US economy. The time has come for a change in direction, as it is more than evident that the tipping point has been reached and the most important factor is for Mario Draghi to retain his oratory skills in reassuring the market. Many of our investors will undoubtedly be aware through advertisements and social media that making a fortune is available to everyone. Simply invest in Bitcoin and watch your money grow. All too often in the past we have seen booms and busts, such as the mining bubble in the 1970s, the tech bubble of the 1990s, or going even further back to the Dutch tulip bubble. Behind the scenes there is growing unease, with the Basel committee and the World Economic Forum putting out lengthy papers on their concerns. The first is that banks, which they have spent much of their time making safe through regulatory action, could be weakened by new entrants. Secondly, the issuing of currency and monitoring of payment systems is important in the fight against global terrorism and organised crime, particularly with regard to money laundering. Cryptocurrencies allow these payment systems and currencies to be avoided. Finally, as in the case of China, the government and authorities should act quickly to ensure that cryptocurrencies cannot be utilised as legal tender, and

3 take a greater interest in the activity of the promoters of the many offerings now appearing on the market. The Future Money investment team believe that we are now seeing a marked change in the overall investment outlook and in view of the various aspects discussed we have set out, at appendix I, a dashboard that uses charts to highlight areas where we are likely to see changes in the future. Bitcoin speaks for itself and we have little difficulty in stating that the chart shows a classic bubble formation. Bond markets have dominated the investment scene since 2008, with low interest rates and ultra-loose monetary policy being the catalyst. It is therefore of interest to see where various assets sit with regard to volatility and yield, and the likely future movement that may result. We were interested to see in a note in the Financial Times stating concerns regarding cryptocurrencies should prompt central banks to make their own currencies more appealing to investors, making this a further reason why the European Central Bank, the Bank of Japan and others should look to exit their dangerous experiment of negative interest rates sooner rather than later! Appendix I Chart 1: Bitcoin Source: Bloomberg

4 Chart 2: Bond Market Yields vs Volatility Source: Bloomberg Strategy While central banks excessive balance sheets remain the principle focus for markets, they should adjust to economic reality. We continue to believe that a welldiversified portfolio of quality assets provides the best balance between mitigating downside risk and providing opportunities for growth. Specific risk is now in bond markets as the Fed continues with the projected move towards normalisation of monetary policy and therefore fixed interest exposure is generally short-dated with inflation protection. We continue to believe that global inflationary risks exist in the medium and longer term.

5 Income Investigations continue surrounding the recent weak performance of a number of the UK Equity Income holding, however initial findings suggest that it was mainly one-off company specific factors affecting returns. No changes are being considered at this time. UK Equity Income 3 40% Other 5% Europe Cash / 4% Money 5% Real Value Holdings in the UK Equity Income space are being investigated for recent underperformance. No changes are currently being considered. UK Equity Income 24% USA 6% 4% Europe 2% Cash / Money 15% 49%

6 Real Growth The Liontrust UK Special Situations fund was added to the portfolio earlier this year. The fund focuses on companies with strong growth characteristics sourced through reliable competitive advantages. This strategy is working well in the current uncertain environment. USA UK Equity Income 20% 37% UK 15% Europe 4% Cash / Money Dynamic Growth The M&G Asian fund has fallen behind its peers in recent months, the reasons for this will be investigated. No changes will be made to the portfolio this week. USA 10% 14% UK 40% Europe 3% Emerging 21% Cash / Money 4%

7 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. For any information about the Future Money funds please contact the authorised corporate director, Margetts Fund Management Ltd, on , admin@margetts.com or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR. A copy of their Terms of Business which relates to investments into the funds can also be obtained using these contact details. Issued by Future Money Ltd Future Money Limited is authorised and regulated by the Financial Conduct Authority Future Money Ltd The Euston Office One Euston Square 40 Melton Street London NW1 2FD