Monthly Investment Briefing: Long hot Summers of the past and present

Long hot Summers of the past and present…

I remember my mother entering me in the fancy dress competition for the Queen’s jubilee, the home-made cowboy outfit of brown velour wasn’t suitable for the summers of the late 70s. The standpipes in the street of the Cheshire village I grew up in, and where my brothers and I shuttled to and fro with pots and pans to collect water; and if you tell the younger generations they won’t believe you. Before I disappear into a re-run of the four Yorkshire men sketch (let’s not reference candles in the top drawer of the French dresser), the sharp yellow colour to the grass across the country, the forest fires here and abroad, the various conflicts across the globe, make it tough to be too cheerful at the minute. We continue to have faith in humanity, there are a lot of people out there doing their best to support the local community, and Casterbridge, alongside others, will continue to do so, particularly the next generation. Be that through building the firm and employing young professionals or supporting children’s development through sport, we agree it’s important now more than ever.

Investment Market Focus…

Although the sun is shining, it’s not shining in the right way. We don’t want grey miserable skies; we don’t want to be drenched, but no rain at all for months? Similarly in markets it feels out of balance, we’re seeing profits, but they don’t feel solid. Since the end of Spring, we’ve seen a febrile volatility start to crawl into markets, the concentration of the rise and fall in the large chip makers that range in value from expensive at the top to fully valued even at recent lows has meant it’s too much risk for not enough reward. However, we have continued our research and discussed in depth the ‘bottleneck’ in supply that gives us Micron as the company best placed to meet that demand. We are taking several opportunities to invest in long term holdings, we like the Union Pacific Railroad and we are keen to pick up Caterpillar and other US infrastructure holdings, but we are always patient. We have gained exposure to the US energy economy and the Data Centres that are core to the AI evolutionary step change. We continue to keep an eye on the downside risk (active managers always should) but we will be greedy when and if the market negatively reacts to any political risk around the  November US mid-term elections and the Straits of Hormuz oil price inflation, leading to more than two interest rate rises by the US Federal Reserve. One wonders whether President Trump will still be so quiet about the FED’s interest rate decisions over the winter?

Economic and Company Results…

We are always concerned when the consensus in a market leads to phrases like ‘it’s different this time’. However the world economy and the underlying company results have been more than solid. We do wonder how long the AI infrastructure boom can continue and the sustainability of financial, intellectual and physical resources? We believe the economic efficiencies from AI will be positive but there are already consequences for existing business models, but that has been true through every societal change. No doubt there were those questioning the wisdom of the wheel, horsepower, railways, the motor car, telephones, internet and its bigger brother the smart phone. It’s our job to invest clients’ funds to take advantage of that inevitable change.

Interest rates and the bond markets…

We have been actively under exposed to bond markets, in comparison to benchmarks and peers, for several years. It is true to say that bond yields have risen in recent months, but we remain cautious. We don’t see interest rates, the path of government debt or inflation improving sufficiently to make UK Gilts, US treasuries or other bonds attractive. You may well ask why we have any exposure? We might be wrong, in the event of a sudden worsening of economic activity and emergency cuts in rates by central banks, bonds could well become a safe haven again, but that is not our central case.

Final words…

It’s important to be invested to take advantage of the global growth in the specific themes of technology and aging populations (and their care- Welltower’s performance has been exemplary) and the resources to support these industries’ development. But we are committed to being diversified to mitigate the risk of the volatility of these ‘Interesting Times’. Enjoy the weather where you can.