Quarterly Review

Experience reads the weather

David Wheildon / November 2017

Meteorologists on the TV may occasionally be haunted by their past predictions but, as David Wheildon recalls, experience can help you read the economic barometer with less complacency. Especially useful in a time of mixed readings globally.

 

It is almost 30 years to the day that Southern Britain suffered a major shock to its system. I’m not talking about the hurricane (which Michael Fish said never was) or indeed the stock market crash, which followed very shortly afterwards, but my first day at work as a financial adviser. Spending the first three months of my career visiting other advisers’ clients and listening to how much money they had lost was a very sobering experience, and burnt the issue of risk and capacity for loss into my soul.

Although at the time it was a miserable experience, it has stood me in good stead over the years, particularly when I moved into investment management. The lessons learned in those heady days of the 1980s still hold good today and have been proven many times over – such as the ERM debacle under Norman Lamont, the dot com bubble expanding beyond belief then bursting, both wars in the Gulf, the financial crisis of 2008/9 and ten years of austerity measures. The mantras of risk management, diversification, regular reviews and monitoring – and in simple terms, not being greedy – are as relevant today as they have always been.

 

Inflation high pressure fronts

We have considered it prudent to take a more defensive stance, both with our asset allocation and with the choice of our fund managers, for nearly a year and continue to believe that this stance is appropriate. Although there are promising signs of the US and European economies expanding (which in itself raises the spectre of rising interest rates) the UK economy continues to suffer under rising inflation caused by the weakness of Sterling and worries over the uncertain outcome of the Brexit negotiations. After nearly a decade of financial support from Central Banks (known as Quantitive Easing) the markets are coming to terms with not only this being withdrawn but the real possibility of global interest rates rising.
Although they are unlikely to rise too fast or too far, the very fact that they move will be a shock to some, and worries will then appear as to the speed and degree of economic tightening being put in place by the Bankers. There is little real growth in the global economy and, although the Bankers do not want inflation to get out of hand, they equally do not want to drive economies into recession by tightening the supply of money too much. With this level of uncertainty, and in this point of the economic cycle, we believe it proves correct not to take too much risk and to take profits when they have been made rather then gamble on ever increasing market values.

The very recent drop in UK sales figures suggests that higher prices and the lack of real (above-inflation) pay rises is having an effect on the consumer, and despite the Bank of England’s concerns over the short term position of inflation, there is also great concern about the impact rising interest rates in the UK will have on sentiment.

 

Gusty winds and sunny spells

The last three months have indeed been relatively quiet for markets, but with the global interest rate saga to play itself out and as we move ever closer towards the Brexit deadline, there is likely to be more movement in the coming weeks. The fund managers have positioned their funds accordingly and we are confident that they will react very promptly to any unforeseen outcomes. We still believe it‘s right, in these uncertain times, to be invested with “stock pickers” rather than funds which are driven by asset allocation by sector. And most definitely the only time to be invested in Index funds is when the active managers are unable to prove their stock picking ability.

The benefit of experience is that one can apply the lessons learned in similar environments from the past to circumstances today. In no way do we anticipate hurricanes or stock market crashes but the global economic scene continues to offer mixed messages. Our experience together with that of the fund managers should provide a great deal of confidence that the portfolios will continue to perform well.

This article is the opinion of David Wheildon,
Director of The Legal Brokerage.

 

This article is the opinion of David Wheildon