It’s Personal

Happy New Year!

2018 was a year to forget for us as investors. It was about damage limitation after the year’s earlier peaks. However I hope 2018 was a year to remember for you as an individual.  Let me take this opportunity of wishing you and your family all the best for 2019. 

As 2018 closed, like the All World Index shown above, we found ourselves counting our losses. The synchronised global growth I described last year has turned into a synchronised global slump. In the same blog I went on to say;

Although the primary trend is for a long term rise in share values, make no mistake there will be more hiccups along the way. A short term downturn or two is common within a long term uptrend. We have not witnessed a non-political hiccup for almost 2 years.

If we view our investment lifetimes as a war, then we lost a battle in 2018.  Similar to those we lost in 2011, 2008 & 2000.

I hardly dare to say it at this point, but we normally see strong investment performance the year following a year of losses.  To me it still feels that the initial spark that re-invigorates the markets is some months off.

Here are the darkening clouds on the horizon.  

China

Although we do not invest directly in any Chinese funds currently, many of the companies we either invest in now or would like to invest in in the future, sell to the Chinese consumer.  If it is envisioned that Chinese consumers will slow down their future spending, then shares prices of those companies who sell to them fall.  A slowdown is underway and a recession in China looks possible.  The knock on effect of a looming Chinese recession was evidenced yesterday by Apple’s almost 10% drop – blamed on lower sales in China.

US

There are absolutely no signs of an imminent US recession.  In fact companies on the whole have been recording record profits and dividends throughout 2018, helped by the recent corporate tax cuts.  But remember that share prices represent future expectations, not current facts.  They tend to look around 18 months into the future, so if the US-China trade war is not sorted soon, market participants expect recession.

The recent mid-term elections brought some balance back to a Trump dominated US government.  However now he faces the kind of stalemate that prevented Obama from changing pretty much anything during his term.  That seems like a good thing, but it has caused their Government to shut down over funding for the Mexican wall.  The dispute looks to be a lengthy one with neither party looking to comprise currently.

Again in the US, there is a war between Trump and the Federal Reserve.  If they continue to ignore each others path – recession will be brought about by a continuing rise in interest rates, which will kill off the growth that powers all share prices.

UK

Bad Brexit or No Brexit?  At this stage nobody can tell.  It’s not surprising that the UK has become a no go zone by Johnnie Foreigner investors.  There is a political crisis on the horizon, the likes of which none of us have lived through before.

Europe

With European elections due in May there is likely to be a further rise in the extremists looking to take more power and disrupt the “Ever closer Europe” status-quo.  Further unrest of the type seen in France and Italy has surely to cause a further reduction in their share markets which have done no better than ours recently.

As you can see, the worries that caused me to sell down in May and June have become more real and have resulted in where we find ourselves today. Lots of darkening clouds.

As I’ve always said, we tend to make money 3 years out of 4.  So what needs to happen to tempt me to invest our collective £25 million of cash.  What am I waiting for?

I believe the bad news as usual is emphasised by the media, hungry for your attention. Good news is much harder to find.  It results in markets always falling too far in the short term.  They are undoubtably oversold currently. This is how I hope the news flow will change in the next month or two;

Here’s where I believe it is all heading.

China

China understands it cannot go into recession.  It would cause civil unrest.  Stimulus measures follow and the Chinese consumer resumes what they want to do.  Buy quality foreign goods.

US

Trump agrees to compromise with the Chinese and the Democrats.  He will claim victory by twisting the facts but common sense will prevail.  This causes the Federal bank to cease increasing interest rates, making US equities seem cheap again.  Investors once more can start to do what they do best.  Invest.

UK

Brexit.  This is a hard one, and I know that like Teresa May, I can’t please everyone!

My preferred outcome is we leave on the 29th without signing the deal.  I understand that business leaders in particular are against this. But I believe in Capitalism and businesses will adapt quickly – they always have. The uncertainty that follows will be enough for the political negotiators to then cob together something that works for us and for Europe in the short term.  There will be some medicine to be taken on our part (and theirs too), but after a clean break a new future can be mapped out.  

Some say they wouldn’t like to be alone, outside of Europe.  If the writing on the wall I’m reading is correct, politically and economically it looks like Europe is the epicentre of the next global financial debt crisis. 

Europe

Banks are falling like flies in Italy. Their bad debts cannot be just written off. Greece isn’t fixed, neither is Cyprus. Portugal, Spain even the major German Banks that have lent much of the money are looking like they will need a capital injection to cover huge debt write offs to the peripheral and southern countries.  I can’t possibly see the European project continuing as it is without any money.  Even with the UK remaining as its second largest funder.

It’s always been personal.

I hope that this year, most of the time I have managed to present how I see things in a straight forward honest way.  I see the expense I incur in searching out balanced news flows as some of the best money I can personally spend as both an individual and as a business.  I must read the opinions of those who concur with me and also those who have a contrary stand point. I must seek out non-biased information, because my family, like your family also have “skin in the game”. 

We lose exactly as you lose.  Fortunately we win exactly as you win.

As I get older and more experienced as an investor, so does each of my clients.  Perhaps it’s no surprise that the vast majority of my clients have taken this give back of their previous years growth completely in their stride.  Many of us have been through years like this before and we know over our investment lifetimes we will no doubt face them again.  To win a war we have to lose the occasional battle. I would like to thank everyone for their mature investor behaviour over this period.  I have been on hand to calm the worries of a few of you and obviously am just a request away from any other nervous client who needs an encouraging word or two.

I would like to wish you all a happy and prosperous New Year.