Updated Economic Commentary 2019

2018 was certainly a more volatile ride for investors than the years preceding it. We saw markets fall sharply in February before recovering this lost ground very quickly, with many markets posting new record highs. However, interest rate policy in the US, nervousness surrounding Brexit and increasing trade tensions between the US and China in particular have resulted in some instability creeping into markets in recent months and we have seen markets return to what some may perceive to be a more sustainable level.

Nonetheless, we should look to provide some context to these losses. The graph below shows market returns from both the FTSE 100 index (in red) and the MSCI World Income (in blue) over the past twenty years - please note that these are reported in 'local currency' terms (i.e. no allowance is made for the weakening of sterling over the past few years which would enhance the returns on overseas investments substantially for UK-based investors).

As can be seen, whilst the recent losses in markets have of course curtailed growth and may come as a bit of a concern given the continued negative press surrounding Brexit, trade wars and other macro events, we feel at present that the losses are not hugely out of kilter with what may ordinarily be expected during the course of any other normal year. We do not feel there has been a catalyst for a prolonged period of poor returns as yet, and whilst of course such a catalyst could always be just around the corner, we do not feel that there is any need to be overly concerned at the moment.

As ever, the market is littered with different risks which, whilst of course we are mindful of them, will not be influencing our portfolio positioning in any way. Brexit, uncertainty in Italy, interest rate policy in the US, growing Chinese debt and the tapering of quantitative easing are all factors which could lead to problems for financial markets. However, as we continue to position our portfolios in a fairly 'safety first' manner, we are reasonably optimistic that values should hold up well relative to the market under more circumstances.

Whilst having a crystal ball would certainly help us, in the absence of any such tools we feel it is crucial to remain in control of what can be controlled - and that is managing risk and costs.

Time in the market not timing the market.........

An old cliche I know, but never more relevant than now - and again, whilst we live through the current world economic and political turbulence there are some facts that we need to remind ourselves;

  • The worst twelve months over the past 50 years since 1970 shows a stock market collapse of over 60% in real (spending power) terms.
  • The best twelve months saw the markets more than double in value.
  • The average annual movement was plus 8%.
  • And 2/3 of all outcomes were between -13% and +28%.


  • The worst ten years over the past 50 years shows a stock market collapse of less than 4% per year in real (spending power) terms.
  • The best ten year period saw the market achieve just under 18% per year.
  • The average annual movement was still plus 8%.
  • And 2/3 of all outcomes were between +2% and +13%.

Source Finametrica.

It is easy to forget what the long term objectives are when the markets are so volatile, but trying to 'play the market' more often than not results in bad outcomes in our experience.

Cash & No Risk asset class

Cash is the one area where, under current conditions, losses in real terms are as good as guaranteed. Inflation is ample whilst under control, but interest rates remain poor and could well remain poor for some time given the masses of government debt on the books!

That said, whilst we do not favour cash particularly it of course remains the only genuinely investment risk-free place to hold monies. For this reason, we continue to feel that an ample allocation to cash remains sensible; there is not so much value on offer elsewhere that would advocate an underweight cash position at this stage.

Verdict: Neutral; cash remains the only true safe haven asset, and particularly where investment timeframes are short, is the only sensible home for savings.

Loans & Debt

We continue to be wary of government debt, especially in the UK and Europe, and traditional corporate debt too could come under pressure if we were to see a prolonged period of rate rises like we have seen in the US.

We have been busy sourcing alternative income funds which, in our professional opinion, will be less susceptible to falls in value in the event of rising interest rates. For this reason we are comfortable holding a fair allocation to this asset class, so long as the funds selected are positioned away from what we deem to be 'traditional' fixed income areas where the 'bet' is currently weighted heavily against the investor.

Verdict: Neutral; holding an exposure to debt is imperative from a diversification perspective, and we believe we have identified a cluster of funds which should be able to remain resilient under conditions which would ordinarily be bad for debt funds.


Traditionally, UK commercial property has been the mainstay for monies invested in this area. We remain cautious however, given the uncertainties on the horizon with Brexit, about the short term prospects for funds of this nature in what quickly becomes a highly illiquid sector when investors become spooked.

Infrastructure, as an alternative property play, continues to look attractive to us. Whilst there was a period of time where political events damaged prices, we feel that recent announcements in the budget make future political meddling less likely and with the asset-backed, long term income streams on offer we believe that infrastructure projects should continue seeing high demand under current circumstances.

Verdict: Neutral; bias the mix of funds towards infrastructure and ensure that there is a good spread of regions and property sectors (infrastructure, overseas, UK, and so on).


We like to view this asset class as one of the more mundane homes for investment funds, and therefore have been disappointed with the performance of some funds we hold here over the past couple of years. We continue to feel strongly that holding an exposure to managers who have a contrary world view is important; if equity funds start to stutter, it is these managers, positioned away from the crowd, who stand the best chance of performing.

Of course, it also remains true that performance needs to come through at some stage. Whilst we are conscious that patience may be wearing thin where some funds are concerned, we would urge investors to stick with managers such as Alastair Mundy. If he continues being wrong, then it could well be that all remains well with the financial world, but if he is right you will certainly want to be holding an exposure to his fund. It is this sort of blended approach to investment strategy that we are advocates of, and whilst we have at times challenged our thought process, we retain belief that this approach will come good ultimately.

Verdict: Neutral; ensure a good spread of strategies across traditional 'managed' funds, absolute return strategies and also managers with a contrary world view.

UK Equity

Here at home, there remains one thing dominating markets on a daily basis - Brexit. Still nobody knows what the future holds as the date draws ever closer, and a case could be made by speculators to exit the UK market completely until the future becomes clearer. However, this sort of approach has very recent form for being wrong! In June 2016 there will have been plenty of investors who did just that, and as the slightly unexpected exit vote emerged, markets reacted in an equally unexpected way, with currency movements stimulating growth in many sectors with an overseas flavour and shortly after even domestic stocks getting in on the act to post huge levels of growth in a short space of time.

We make no bold predictions as to whether this could be repeated again, but what we do know is this; FTSE 100 companies tend to derive much of their earnings in overseas currencies and if markets do not like the outcome of Brexit and sterling takes yet another hit, many large-cap UK-listed companies should benefit from this in theory.

Smaller, more domestically-focused companies may not benefit but at a time where the only certain thing is that nothing is certain, we do not feel that trying to second guess the outcome is a wise move. If markets react positively to whatever deal is eventually struct (if one is struck at all), you will not want to be sat in cash.

Verdict: Neutral; ensure that profits are taken from any areas which are looking bloated, including AIM shares, and look to control the controllable - risk!

Overseas Equities

Our overseas equity suite of funds has performed exceptionally well in recent years, and whilst we have arguably held too little exposure to the US in light of the incredible growth there, we feel that the portfolio of funds we are recommending represents a better risk-managed proposition than bland global indices.

President Trump took the unusual measure of breathing extra air into an already thriving economy via his fiscal stimulus measures and whilst this was of course good news for markets in the short term, if or when this bubble reaches breaking point, most investors with a heavy US exposure and not in possession of a crystal ball will be giving back the gains they had made prior.

Our opinion remains that controlling risk is paramount. Holding a US exposure akin to global indices would mean having almost 60% of the overseas allocation in the US, and in a market which is so far into a positive cycle, and contains a lot of absolutely gigantic companies which dominate the economy (Apple, Google, Amazon, for example), this is not a position we are prepared to entertain replicating.

We remain supportive of thematic investing. In a world where we predict global economic growth will ultimately be smaller, we feel that what growth is out there could be focused upon a relatively small number of sectors. Identifying these growth stories early on, and backing them in a meaningful way is one of the ways in which we feel future growth could live up to previous expectations (although we have our doubts!).

We continue to feel that artificial intelligence, cyber security, battery storage and water all remain themes which should continue to gather traction in the years ahead, and whilst short term macro events (Brexit, trade wars, etc) could create some short term pain, we remain convinced that these themes are good places to be invested where the long term future is concerned.

Emerging markets have been a painful place to be invested just recently, and we are therefore pleased that our house view has been to hold a fairly light position here. A strong dollar and a weak oil price is always going to spell trouble for these countries as a rule, but as always it is important to retain a balanced view. Emerging markets will bounce back, and when they do, expect a healthy rebound!

Commodity investing (excluding gold) is an area in which we have been pretty active over the years, although at present we are fairly light in this area. The rise of the electric car, renewable energy in general and a generally more environmentally-friendly attitude across the world leads us to believe that the future for crude oil is actually quite bleak. Of course, it will be some time until petrol cars are finally consigned to history and for so long as production remains high then oil should continue to go through both positive and negative cycles as it always has done. However, with a minimal allocation to commodities within our portfolios, we feel that renewable energy funds are the way to go. We can only see increased traffic heading this way in the years ahead, and whilst we sympathise with investors who may wish to see a more 'traditional' energy investment included for the high growth prospects, in fact we believe that renewable energy is likely to be less volatile than 'dirty' energy and possibly much more lucrative in the years ahead.

Finally - gold! This has been a boring trade for the past five years or so since we have been supporting its inclusion, with prices remaining stagnant for the most part but, in fact, this hasn't been at all bad. Bad news for gold tends to mean good news for shares, and therefore the inclusion of physical gold has simply acted as a hindrance rather than create a wholesale problem. In recent months, physical gold prices have started to gather momentum. As investors grow nervous over stocks, so physical gold tends to see an uptick in value, and if a catalyst emerges for a serious correction (hopefully not!) we anticipate physical gold prices picking up quickly and sharply.

Verdict: Neutral; continue to take profits from any areas that look bloated, and ensure a diverse mix of assets across all the key 'sub-sectors'. After a core holding to developed markets is allocated, we are giving a slight bias towards sector specific 'thematic' investment funds as we believe this strategy could capture a higher proportion of economic growth in the years ahead.

2019 could be an interesting year. There is certainly a feeling that we are currently sat in the 'calm before the storm'. Politics will play its part, but it was ever thus. Countries have been moved in and out of the European Union before and it will happen again. Far-left governments have presented a short--term threat to domestic markets before and it will happen again. Unless your objectives are ultra-short term, we will continue to offer the same advice - make sure your risk-take is right, and you should be able to weather any storm in time, without the wealth you have worked so hard to accrue being terminally damaged.

Article published: 29/01/2019

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