Fund Management Diary

Transcription

1 Fund Management Diary Meeting held on 14 June 2016 Deficit Matters In late October 2013, the US Treasury issued a report saying that the German current account surplus which at that time stood at 7% of GDP (but is now higher) imposes a deflationary bias for the Eurozone as well as the world economy. The an Commission promised to review the surplus under its excessive imbalanced procedure while German politicians dismissed the claim on the basis that the surplus was mainly with the rest of the world which did not affect the periphery, so that the surplus reflected the country s competitiveness with deflation in the periphery being positive as it indicated that the currency union was becoming more competitive! Commission report is still awaited. They were wrong on all counts and the While there is no doubting German competitiveness, the weakness arising from its austerity provisions was subject to the Freiburg School philosophy as set out in last week s diary, restricting domestic demand while depressing structural reforms in the periphery. Additionally, surpluses in Germany and other central economies spread deflationary pressures due to the weakness of inflation and indeed annual consumer price inflation has struggled to rise to over 1% since. It will be remembered that despite ardent opposition from the Germans, the an Central Bank under the leadership of Mario Draghi, looked to undertake quantitative easing under his slogan doing whatever it takes which, much to the relief of the Bundesbank, reduced the value of the Euro, thereby stimulating their trading position. Almost three years later, the phenomenon that is all too apparent is that economies with big trade surpluses tend to experience currency appreciation which has been particularly seen in Japan, the USA and up until 2013, China. The solution turned to by central banks was to indulge in further quantitative easing, providing a currency race to the bottom, which has been referred to on numerous occasions in our diaries. China which after the financial crisis of 2008, expanded its economy with fiscal and infrastructure spending measures, almost single-handedly pulled the global economy out of recession creating a commodity boom. However, following its move to a consumer driven economy with increases in wages, it has now suffered, as other major world economies retreat into the deflationary cycle, being caused by extraordinary monetary policy and the build-up of trade surpluses. While this may give justification to the German philosophy, the risks to the global economy are increasing. This was highlighted at the recent G7 meeting with Japan s plea for fiscal stimulus being rejected, which was followed by a German accusation that Draghi was destroying their savings industry, with his additional 20bn of corporate bond purchases which is now taking effect. Draghi reported that there is excessive savings over investments and for interest rates to be higher tomorrow they would have to be low today, with the ECB s effectiveness being hampered by unwarranted fears of a Euro breakup with bank deleverage. He concluded that monetary policy can always deliver because inflation is a monetary phenomenon. This has been roundly dismissed by leading economists on the

2 basis that central banks have created a monopoly with asset purchases creating a dangerous bubble which without the money being put to use through fiscal measures, will make a return to normality unlikely. Leading investment managers such as Bill Gross and George Soros, are becoming increasingly concerned over the global outlook, with the former declaring that there is now a $10 trillion negative yield supernova ready to explode, while the latter has been setting up various Bear Trades and buying gold and gold shares to protect his portfolio. Also, Peter Schiff, a leading Wall Street stock broker and author of the best-selling book Crash Proof believes that the Fed has to talk up rate hikes, but the truth is that its policies will fail and they can only get away with it up until a time when there is a return to recession, then the problems will really begin. The reality of the situation is that lenders in and Japan are rebelling against central bank negative rate interest policies, with Commerzbank looking to store cash in vaults as it no longer wishes to be charged by the ECB for the privilege, whereas, in the past they were paid interest. It is almost inconceivable that large amounts of money could now be held in vaults for which storage and insurance costs will become payable, totally defeating the circulation of money theory and Draghi s belief in inflation. In Japan, the Bank of Tokyo-Mitsubishi is threatening to withdraw its membership as a primary dealer of sovereign debt with other banks considering following the lead, if the Bank of Japan does not secure a stable absorption of JGB s (Japanese Government Bonds). As we approach the Brexit Referendum, the UK has over some considerable time suffered from a balance of payments deficit which, in the current global economic climate, we consider to be of particular importance and on 14 November 2012, the House of Lords posed the question to ask Her Majesty s Government what is the estimate of the United Kingdom s balance of trade with the an Union, once shipments in transit through the ports of Antwerp and Rotterdam to non-an Union destinations are excluded. Replying for the Government, Baroness Warsi stated that the UK s trade in goods with the EU was in deficit by around 43 billion, while in relation to services, UK trade was in surplus by around 16bn, so the overall deficit was around 28bn. She also stated The Eurozone s biggest single customer worldwide, both for All Trade (Goods, Services, Income, Transfers) and for Trade in Goods only is the UK. The Eurozone s biggest trade surplus anywhere in the world is with the UK. We are attaching at Appendix 1 and 2, the briefing notes with only tables 1 and 2 (due to lack of space), with these being the most up to date statistics we have been able to find. In percentage terms the trading balance has remained similar to today although the UK s trade with the rest of the world is slightly greater now, than with the EU. The other statistic that we believe to be important is that the gross contribution by the UK to the EU budget is around 2,788bn which, after the rebate and other payments in one form or another to the UK, nets to the order of 11.3bn per annum. The Margetts investment team debated the Brexit Referendum concentrating on the balance of payments deficit, together with the contribution to the an Union, within the themes being discussed at today s meeting, on a majority vote the sway was in favour of leave. However, there is unanimous agreement that whatever the result next Thursday, we did not believe that the Eurozone could last beyond seven years in its current format.

3 Appendix 1

4 Appendix 2

5 Strategy Brexit and Trump Presidency will continue to dominate financial markets with increased volatility being reflected in the defensive nature of the value stocks in our portfolios. We remain with a bias towards equities containing earnings growth and dividends as a principal factor. We remain cautious of bonds favouring special situation funds for reasons set out in our themes and we believe that current market volatility will offer opportunities on the positive side. Providence have been volatile over the week in the run-up to the Brexit vote. The bond allocations (which are short duration focussed within the portfolio) have been relatively weak as longer duration investments have seen yields fall further; but we are not looking to change this strategy given our long term positive view on inflation/rising interest rates. Asia Pacific UK Equity Income 39% Bonds 31% Other 5% Money 13% Select The Majedie UK Income fund has weakened relative to the sector over the week despite a period of recovery. The team will continue to monitor the fund closely over the coming weeks; but are not looking to make any changes given the market volatility in the run-up to the Brexit vote. USA 12% Asia Pacific 11% UK Equity Income 19% UK 20% 11% Bonds 14% Money 7% Emerging

6 International The committee continues to consider alternative funds for the Legg Mason IF Martin Currie holding which has underperformed relative to the sector over recent months. No other changes are expected in the short term. USA 3 Asia Pacific Money 12% 2% Emerging 9% 21% UK 15% Japan 5% Venture The portfolio is currently invested in line with our themes and no changes are being considered at present. Specialist Other 7% UK USA Asia Pacific 34% 11% Emerging 30% Money 0%

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. 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