Harrumph. In the light of recent press speculation about my highly personal affairs, I feel it is finally time for me to set the public record straight about my long-standing friendship with Miss Hancart, and about the extent to which she may or may not have been involved in my many personal and financial decisions over the decades.
It is utterly incorrect and misleading to allege, as some of the gutter press have done, that I ever obtained any illicit financial advantage from my dealings with the very personable Helena. It is perfectly true, however, that I did encourage readers, on her suggestion, to avoid certain investment locations – such as the stricken Japanese market during the nineties and early noughties, even after the Nikkei had dropped by a bargain 80%.
Or the debt-saddled German economy after reunification, which duly took a decade to sort itself out. And that I never had cause to regret those decisions during those difficult years, although I should add that things are certainly a bit different now.
It is also correct that I just happened to be largely in cash through the “cyclical” stock market crisis of 2008, and that I had switched my family’s mortgage into a base rate tracker as early as 2007 – thus obtaining an advantage of many tens of thousands of pounds at the expense of my bank. But I submit – no, I insist! – that this advantage was no insider matter, but was rooted instead in a careful top-down holistic analysis – helped, if I may say so, by just a little luck, and the very wise counsel of the lovely Miss Hancart.
Helena is currently helping me and my family to assess the complex developing situation in Donald Trump’s America, and to determine the likely direction of world trade and economic growth in the light of potential trade wars, a slowing China and a very messy Brexit negotiation. This is a fluid situation, of course, and I ask the press and the media to respect our privacy at this highly sensitive moment. Or Messrs Sue, Grabbitt and Runne will be in touch very shortly. Thank you.
Ah, hubris! One of the many hazards about spending forty years in financial journalism (sigh…) is that you start to persuade yourself that you have a personal handle on the way that economies operate – and markets, too. Or at the very least, that you won’t fall for the same cut-and-run scams that impressionable youngsters might fall for…
Or that the trusty principles that worked so well back in the eighties – budget deficits bad, oil prices critically important, derivatives often dangerous, the dollar as the world’s only reserve currency, emerging markets always at the beck and call of the west, cross-border investment tricky, and inflation the biggest worry of all – might have been set in stone for all time. It ain’t necessarily so.
Not now that China is fast becoming the world’s biggest economy; that the euro is a popular denomination for bonds; that investors in almost any country can access foreign markets in price-critical ways; and that whizzy alternative currencies such as bitcoin are offering at least peripherally significant competition to the established ways of thinking about how to store wealth, and where. It’s all up for grabs, and the traditional rules don’t necessarily apply any more.
Helena and I made our share of catastrophic mistakes over the years, mostly because we weren’t keeping up with the changing times. We overstayed our welcome in China and big oil, and we duly we paid the price. We convinced ourselves, tragically, that our Latin American fund would bounce back, but it did the opposite – because, as we found, there was more divergence than unity in the region, and precious little good governance. We had an unending ability to pick dud tech stocks, and we never did learn how to sell with the enthusiasm we reserved for buying. Oops.
Restless in Reigate
Okay, I’ll pull my tongue at least partially out of my cheek. In case you hadn’t noticed, this is not generally considered a particularly good time to go long on equity prices. Not while so many balls are being juggled at once in the global marketplace. (I almost said chainsaws there, but I thought better of it.) The only certainty we have these days is uncertainty, and we have to make the best of it.
Not least, because the two great dictums of the financial adviser’s world still hold. Firstly, that trying to time the market is a mug’s game unless you’re either George Soros or a very, very lucky financial journalist. And secondly, that long term buy and hold is still the cornerstone of best advice for the overwhelming majority of clients.
And yet. The Investment Association reported in September that UK investors had pulled £1.2 billion out of UK equity funds during July alone, bringing the total withdrawn since the Brexit vote of June 2016 to £13 billion. And that they had switched their money into fixed income, which had been the fastest-growing sector for five straight months – with July’s net inflows totalling £2.2 billion.
They certainly weren’t going for non-UK investment funds either, by the look of it. Although the Financial Times agreed that Asian and global equity funds had pulled in net retail sales of £154 million and £146 million respectively during the month, that inflow had been more than outweighed by outflows of £90 million from North American funds, £205 million from Japanese funds and a massive £430 million from Europe funds.
Now, these sums aren’t exactly huge in comparison to the overall size of the UK-domiciled funds industry, which the Investment Association put at £1.3 trillion in July. But it isn’t unreasonable to conclude that something out there is unsettling the horses even if they’re not actually frightened yet.
The riddle remains
As a (self-declared) economist, I might be tempted to give you the usual spiel about unsustainable price/earnings ratios, peaking profit ratios, or slow inflation which suggests that there’s nothing runaway about the economic recovery in the US. I might try to doubt that Donald Trump’s $1.6 billion tax handout has done anything more distribute “empty calories” into the US economy, and I might try to insist that some sort of a reckoning is on its way. Etcetera.
But it’s a bit awkward that America’s joblessness figures are still genuinely falling, and that they’re well below the levels (5% to 10%) that we used to think were necessary in order to keep a workforce sharp while also keeping wage inflation down. Especially since US retail spending has been up by an annual 3% to 4% for most of this year.
Somehow the Prez has pulled off the elusive trick of generating genuine low-inflationary growth optimism in the United States. While committing the cardinal sin of splurging public money during a period of strong demand growth. (Keynesian theory says that you can do that to good effect during a slump, but that doing it during a boom is just asking for trouble.)
Europe and China offer at least slightly more conventional scenarios. We can safely say that the EU economies would have been in the soup even without the threat of trade sanctions from the White House – because the European growth slowdown easily predates the arrival of Mr Trump. EU unemployment was running at a hefty 6.2% in August, even with just 3.1% in Germany and 3.8% in the UK. Annual growth was down to 1.4% during July, half the rate of January 2018, and the weakest growth since third-quarter 2013.
If we think that’s bad for portfolios, we might do well to remember that China has long since disproved the inevitability of a link between economic growth (generally strong) and stock market performance (with the Shanghai Composite down by 40% since mid-2016 and 50% since late 2007). So could the argument go the other way? Might we in fact be nearing a Buffett (“greedy when others are fearful”) moment?
Let’s suppose, just for a moment, that President Trump agrees a significant trade deal with China; that Boris Johnson might agree a shock consensus with Brussels and the UK Parliament on a deal that would keep Britain within the EU’s customs union – with extra provisions for the services sector, of course, which accounts for 70% of our exports but doesn’t fall within the customs union; and that the EU itself settles its growth worries – perhaps with the planned resumption of quantitative easing. Would that fix the problem?
Yield unto me
(Steady on now, Helena, my wife is beginning to suspect.) The reason that we can’t join the feelgood party yet is that the yield curve is pointing in completely the wrong direction. So many investors are fretting about high equity valuations these days that the resulting surge toward fixed interest has driven yields below zero. And in effect, that means that short-term borrowing costs are now higher than long-term costs.
Which is what we call a yield curve inversion, and for the last seventy years or so it’s been a clear indicator of an incoming US recession. (The reasoning for that is opaque, but the principle holds up well enough in practice.) What ought to bother us is that it’s happening not just in Europe, but also in the apparently booming USA. August 2019 saw the two- and 10-year US treasury yields going upside down.
It looks worse in Europe, where around half of all eurozone government bonds are now yielding less than zero. Which means, in effect, that investors are so wary of equities that they’re no longer getting yields at all, but are actually paying the issuers for the privilege of lending money to them. In round figures, about €3.8 trillion of the €8 trillion of bonds in the Tradeweb system are negative. Globally, the volume of negative-yielding bonds is thought to total $16 trillion, with Japan joining the club in August 201
Even commercial banks are getting in on the act. Some Swiss and Danish banks are starting to charge deposit interest to their higher net worth clients, where they might once have offered them modest amounts of interest instead. This is all part of the reason why central banks around the world are currently under pressure to resume the quantitative easing of the last ten years, which most of them have now suspended. (The logic being that QE would boost consumer growth, which would help to send inflation in a higher direction and would thus correct the downward trend of lending and yield rates.)
Governments can also choose to boost spending by cutting taxes or by introducing incentives for corporate investment which should filter down to the man in the street and reboot the growth cycle. Indeed, President Trump seems highly likely to do that in the next 12 months as the 2020 election approaches. The question, of course, is whether or not that is a necessary step, at a time when US consumer optimism is so high? It would certainly make more sense in the EU, and in parts of Asia.
And yet, the problem is that nobody has the slightest idea whether this will work? It’s fair to say that we have never seen so much yield inversion, nor so many negative yields (outside slow-growth Japan, perhaps.) We are also not sure how long it would take for a reflationary strategy to bear fruit – some experts consider that a time lag of up to two years may happen.
And then there’s one more factor that we so easily forget. Namely, that hundreds of millions of investors around the world are currently keeping cash on the sidelines, under increasingly unprofitable conditions, while they wait for the bounce that an expected global equity correction would produce.
Certainly, the buying opportunity would (or rather will) be brief, and perhaps savage. Those clients who decide to stay put and stay invested will be the ones who won’t get caught in the stampede when the moment finally arrives and the brokers’ websites go down from the overload.
We’re still a long way from all that, of course, and at present it looks as though things will probably get worse before they get better. But miracles have happened, as my mother used to say. In the meantime, clients are being advised:
- To keep decent cash buffers up. There’s no point in being forced to sell at the wrong moment.
- To consider broadening the global or sectoral ranges of their portfolios.
- To look hard at active managers pursuing value strategies – there will probably be opportunities up for grabs.
- To review risk, with particular regard to their personal situations. Especially important if drawing down regular incomes from a fund.
- Not to underestimate the value for money that UK equities currently represent to other countries’ investors. If the pound stays weak, they’ll like that. If it strengthens, you’ll like it.
Who told me all that? My other very good friend, Miss Scenario of course. Good old Rosie. Known her for years. No publicity please. No further comment.