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Strength of the pound hurts the Establishment Investment Trust


Strength of the pound hurts the Establishment Investment Trust – The Establishment Investment Trust (ET.) released it financial results for the year ended 31 March 2018.

  • The company’s share price rose by 8.9% (total return), although the NAV fell by 2.5%.
  • Excluding dividends, the share price rose 3.9%. The NAV fell by 6.3%.
  • Since launch in 2002, the share price total return has been 7.3% per annum while the NAV has returned 8.1% per annum.

Sterling (UK Pound)  rose 11.9% against the US dollar during the year.  This detracted from performance, as any gains made in US dollars or currencies correlated to the dollar would have had to outperform the currency to contribute positively to the performance of the portfolio.

The company is globally invested but the largest area of exposure is to Asia. Asian markets performed strongly until correcting sharply during February and March 2018.

The chairman pointed out that “global markets sold off on fears of resurgent inflation as a corollary of world economic recovery and on concerns that USA/China tit-for-tat tariffs would develop into a full blown trade war. A feature of Asian stock markets has been the narrow concentration of gains in predominantly technology stocks reflecting not only their growth potential but also the pursuit of index heavyweights by the large amount of money now managed by passive ETF strategies.”

Comment by the Blackfriars Asset Management. investment manager on monetary policy and global growth

“The recently appointed Chairman of the Federal Reserve, Jerome Powell, appears keen to dispel any notion that he is just another dove.  While the US Dollar has drifted lower over the past year there are justifiable fears that overzealous monetary tightening by the Federal Reserve may derail growth in the United States and elsewhere.  Multiple interest rate rises by the Federal Reserve would place pressure on the weaker currencies in the Asian region, especially within ASEAN and in India.  This may – in turn – explain why holdings such as Astra International, IJM Group and ITC have suffered something of a derating of late.  Philippine equities in particular have been sold off aggressively with the Central Bank perceived – correctly in our view – to be some way behind the curve as domestic demand booms, the trade deficit rises and inflation ticks higher.

 The Trump administration has finally turned its guns toward trade imbalances and, unsurprisingly, the opening salvos have focused on China, which continues to have a substantial trade surplus with the United States.  All commentators acknowledge that there are no winners in any trade war and one hopes that both sides will work towards an agreement.  However, markets tend to shoot first and ask questions later, so the share prices of portfolio holdings such as Minth Group and Johnson Electric, both of which are suppliers to the global auto industry, have had an uncomfortable ride in 2018.  The ongoing elevation of President Xi and the abandonment of the two term leadership limit may have disheartened many, but a key shorter term positive is the increased certainty, or visibility, of China’s economic policy.  The shadow banking sector will continue to be squeezed, supply side reform is ongoing and the promotion of domestic consumption continues.  Importantly the cautious, but progressive, opening of previously protected domestic sectors can only help defuse the current trade tensions.

 The longer term Asian story – that of rising consumption and a region increasingly driven by domestic demand – remains intact and the Company’s portfolio continues to reflect your Investment Manager’s confidence in this development.  Asia remains in rude health and after a year of admittedly indifferent returns, your Investment Manager is optimistic of making good progress in the year ahead.”

ET. : Strength of the pound hurts the Establishment Investment Trust

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