Summer Investment Review
Markets and Global Economy
The weather has brought smiles to people’s faces and a beard to mine (my wife likes it, what are you to do?). No doubt the national pastime of frustration with the weather will give us all something to chat about in the British beer garden; it will be full of brown foliage due to the hose pipe ban and the lager flat due to the CO2 shortage, but we’ll soldier on (I enjoy the occasional chilled cider but then I have lived in the south west for 15 years).
Investment markets have risen sharply since the end of March this year, a little too swiftly for our liking so we have reduced our equity holdings. We did this by selling our ‘passive ETFs’ in the S&P 500 and FTSE 100 – we still have exposure to those markets but largely directly or through active fund managers. The currency volatility has given us an opportunity to get up to weight in Emerging Markets and Europe over the last few weeks, we’re still invested but we are active in these ‘choppy waters’.
We are concerned that Trumps’ protectionist behaviour, that has now made it as far as the technocratic civil servants, is a reality and with a purpose, supporting inflation. Deflation risk is something that we haven’t talked about for a long time, thanks to good old QE (quantitative easing), but that is now being unwound over the coming few years and that must be deflationary (If you accept that QE was inflationary). Not the place to discuss the US leadership, there is method to the ‘extreme economic positioning’, but protectionism destroys future jobs and economic growth in order to protect the incumbents. This can lead to complacent, economically damaging behaviour. We had protectionism in the 1930s when over 30% of employment was via farming – hence the US Non-Farm Pay Rolls data excluding farm workers because 90 years ago, they dominated the statistics. The latest US number for the percentage of farm workers is 2%, at a time of the fullest employment since the turn of the millennium and 1974 before that. Protectionism may mean we have to start growing our own food; I don’t think we want to return to that, I haven’t even got an allotment.
Interest rates in the US will rise faster than the rest of the world but still at slower pace than was expected in January of this year. Interest rates in the UK will follow suit but at an even slower pace. Mr Carney seems keen to raise interest rates in August, unless we have further political unrest, I think the risk of that is reasonably high. I doubt anyone would be surprised if the rate rise is deferred to November. However, interest rates are on the rise and we have to think about the effect that is going to have on the pricing of bonds and the liquidity of the corporate portion of that market. We are looking at reducing our exposure to interest rate and liquidity risk, perhaps through exposure to hard commodities, such as gold; the approach to that through the actual commodity or those companies involved in that market is to be researched over the coming weeks.
We continue to invest with our total return in mind, constructed with equal weight on the natural yield through dividends and coupons to the more volatile capital return, other than for those with high risk and significant capacity for loss. Our macro-economic position is for a harder/messed up Brexit or UK internal political strife, due to unsuccessful negotiation with the EU commission, giving us a weaker GBP currency and lower domestic growth. So we are ‘overseas’ and ‘UK dollar earning’ company focused; that has supported returns in recent times. If Mrs May pulls off a miracle then we will lag but the risk to the downside is our greatest concern, whilst still providing income to support any required regular withdrawals.
The opinions expressed are not necessarily the views held throughout Casterbridge Wealth Ltd. The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.
Past performance is no guarantee of future results. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.