Pottering About
This part of the monthly briefing is where I comment in broad terms on what I think is happening in the financial world. It is of course only my opinion based on a range of data and commentary that comes my way from the news media and specialist research services.
My blog post ‘ebb and flow’ (see it here) is my current assessment of the state of global stock markets – not really moving up or down in a permanent pattern. However, my reading of data for the first quarter of the year and the (now even less predictable) spouting from the politicians leads me to some conclusions:
The US economy is growing reasonably but the extent of the government deficit and the way it will grow is a big worry. It is perverse to have a fully utilized labor force, rising interest rates and then the government reducing taxation. I share Rex Tillerson’s view that Trump is a moron, but so do thousands of economists, so I am not claiming any special knowledge. In effect the US is borrowing money in a way that will hasten its demise as a world power, but such final binges of empire can go on for centuries!
In the US there are of course companies that are Californian first, global second and then American. These are great businesses for investors because they generate big cash flows, pay big dividends and have share buy backs. Although the US is a huge borrower it is getting less credit worthy and just like the client base of Wonga, it is going to have to pay more interest and perversely that will push up the dollar in the short term. That is good for UK investors owning US shares. I am still enthusiastic about Tech and Innovation funds (but not Tesla!).
China is now a settled economy with the internal improvement of the wealth of the population as much an objective as increased exports. That means investing in shares that benefit from the gigantic new middle-class consumer base makes sense. Much the same can be said for India, but short-term volatility will usually be high in India partly due to the enthusiasm of the population for day trading shares!
Europeans and people in the UK are showing more nervousness about what Brexit will really mean, largely because it is pretty close and nobody yet knows! Germany remains a stand out growth economy but Italy is still not under the right political control from an investor point of view. M. Macron has his work cut out in his attempts to be a new Thatcher, but he has reasonable chances of partial success in my view. Europe is on balance a safe place to invest and the Euro is likely to appreciate relative to Sterling over time, mainly because of the fact that trading with the EU or EEA is going to be a bigger trade than with the UK.
The UK economically is really the weakest large player if you rely on data and charts (growth is feeble), but some UK shares must now be good value so I am in favour of increasing weightings in UK special situations and opportunities funds and smaller companies especially those focused on the domestic economy. UK consumers are sitting on their hands pre-Brexit (part of the cause of the retailers’ woes) and there might just be a big binge when it all finalizes.
Japan looks like having a period of political instability, but the economic data is not bad so it would be somewhere I would take profits but still hold a low base allocation.
Emerging markets have been my favourite place to invest for decades and are reasonable value as an asset class, but the categorization is not really much use any more, as China and India at least need to be looked at separately. The idea of BRICS as a quick summary of the key new markets looks positively weird today! I am in favour of looking to mature emerging markets as a source of dividends or even loan stock interest nowadays and newer less developed markets can be the source of capital growth. Funds marketing departments have not generally caught up with that idea yet, so I have yet to find a “really newly emerging markets’ fund, but it will come.
Pay Attention to This
Some of the UK’s most famous investment managers have had a really bad time recently – notably Neil Woodford who runs his own company. Without any external supervision, he appears to me to be backing his own judgement beyond a level that is prudent. Knowing how strong charismatic people usually behave, this does not surprise me and I said that might be an issue when he launched his funds and I did not recommend them.
Other fund managers may, I suspect, have been quietly following his lead, given that he publishes his stock holdings in full.
If your equity income fund has underperformed recently read the last 2 or 3 fund fact sheets and see what the top 10 holdings are. Do you own lots of Capita, Compass and Provident Financial shares?
Weeding and Planting
I would be looking carefully at portfolio balance relative to your original objectives after the strong returns in 2016 and 2017.
In the garden, plants that like the local environment and seasonal conditions grew like mad and can squeeze out other desirable planting options that will do better when the weather changes. A gardener will ruthlessly cut them back knowing they will grow again in the future, to allow for something that might do better when the weather changes.
So, check your asset allocation, which may have moved a fair bit without you knowing. European and Asian investments may well be a higher proportion than you thought.
New funds that might be added would in my portfolio be those that are Trump and Brexit independent as far as possible. That means looking for managers with rigorous research who love strong cash flows and what are called “moats” – the defences a business has against someone coming in and taking over its market position.
Some dullards that might need weeding out will be the Absolute Return sector where previously well run funds have got oversized, complacent or just out of position (think Wisteria in late Summer) and need pruning or they will be a drag on performance, losing money rather than preserving it. But bear in mind that some are insurance policies, so won’t pay out until there is a negative market event.
My fund research list is slowly growing and that may offer more pointers over time.