Economic & Political Roundup

Kindly sponsored by Polar Capital and Allianz

A collation of recent insights on markets and economies taken from the comments made by chairmen and investment managers of investment companies – have a read and make your own minds up. Please remember that nothing in this note is designed to encourage you to buy or sell any of the companies mentioned.

 Roundup

Global stocks ended 2019 on the front-foot, to complete their best yearly advance since 2009. A return to interest rate cutting by the Fed, the US central bank, is prolonging the bull market. Elsewhere over December, progress in US / China trade relations and a Conservative Party victory with a clear majority in the UK general election affected sentiment positively.

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 Global

Cheap money catalyst should not disguise lingering uncertainty

Blue Planet’s manager, Kenneth Murray, believes conditions are rife for another financial crisis as debt levels soar. In the event of a crisis, he believes central banks would have far fewer options to intervene this time around. Nick Train, manager of Lindsell Train, explains why the trust focuses on ‘running its winners.’ James Will, chairman of Scottish Investment Trust, reflects on the spread of negative yielding government bonds. He says that It is uncertain if this more mainstream adoption of negative interest rates will prove transient or become the norm and that its long-term implications are not well understood.

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 UK

Cautious optimism following election

Artemis Alpha’s managers, John Dodd and Kartik Kumar, say there is compelling value in fundamentally strong businesses. They expect the December general election outcome to allow investors to investors to resume concentrating on companies, rather than political matters Steven Bates, chairman of BMO Capital & Income, believes that low interest rates are hiding a multitude of sins, which is keeping poorly managed companies in business. He expects rates to remain low for a long time and questions the outlook for future productivity and growth as lingering uncertainty depresses capital investment. Steven is of the view that central banks do not believe that the global economy is robust enough to withstand higher rates and there is too much debt in the system to allow a significant slowdown or recession.

In the view of Blackrock Income & Growth’s chairman, Jonathan Cartwright, as the dust settles on the general election outcome, it remains to be seen whether a comprehensive trade deal with the EU can be negotiated by the deadline of the end of 2020. BMO UK High Income’s chairman, John Evans, says the recent increase in UK corporate activity could be a good sign that value exists and is encouraged that a wider range of investors appear to share this view. Chelverton UK Dividend’s manager’s report says there are signs that UK growth will be maintained and might, next year, start to gently accelerate. The trust is also re-assured by the fact that many of their underlying companies continue to increase dividends, with many balance sheets in good shape.
Mark Barnett and James Goldstone, managers of Edinburgh, reflect on the substantial differential between highly rated global non-cyclical stocks and depressed domestic economically sensitive shares. This differential sits at a multi-year high and offers the most glaring opportunities within the UK stock market, in their view. The managers believe the extent of this mispricing is highlighted by the spread between dividend yields and corporate bond yields over the past ten years. Over this period, dividend yields have remained broadly flat, whilst corporate bond yields have declined markedly. Mark and James also discuss the pick-up in M&A activity in the UK.

James Henderson and Laura Foll, managers of Lowland, note that companies in aggregate, are reporting results in line with modestly reduced expectations. This suggests the current slowdown in global economic activity is, at least to a degree, reflected in earnings forecasts. Andy Pomfret, chairman of Miton UK Microcap, believes that importantly and uniquely, the UK stock market contrasts with others in that it has retained a vibrant universe of quoted microcaps over the period of globalisation. He believes that UK microcaps themselves are overdue a period of major performance catch-up. Finally, the manager of Schroder UK Mid Cap touches on recent surveys indicating that UK consumer confidence remains stable and that UK consumers are more confident about their personal economic situation than about the country’s general economic prospects.

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 Flexible investment

Germany has been a casualty of the trade war. It stands on the edge of a recession

Mike Brooks and Tony Foster, managers of Aberdeen Diversified Income and Growth, expect listed equity returns to be lower than their long-term average. This is partly a function of subdued long-term economic growth expectations, but also due to cyclically-stretched profit margins, especially in the US. However, they do have some concerns about the outlook for the business cycle. While their base case is for the continuation of sluggish economic growth, there is a relatively high downside risk of a global recession. In fixed-income, they believe emerging market government bonds are a relatively attractive asset class – particularly the local currency variety. Yields are high, especially relative to developed market bonds, offering strong income returns.
Hansa’s manager, Alec Letchfield, thinks that a casualty of the trade war has been Europe, especially Germany. With exports central to the German economy, particularly to China, he notes that Germany stands on the edge of recession. Alec’s report goes on to discuss the following key themes:

• Inverted yield curves: Precursor to recession?
• Value vs growth: Will value investing reassert itself?
• Peak margins: A mean reverting factor?
• Peak valuations: Time to sell?

Elsewhere, JPMorgan Elect’s chairman, Alan Hodson, says equities still appear fairly valued when compared to most other investment alternatives, particularly in the UK. He also discusses his view that, over the longer-term, events at Woodford Investment Management will prove beneficial to investment trusts generally. Finally, Seneca Global Income & Growth’s say that after the 10-year bull-market, signs are that things will change. PMIs are falling, tensions remain high between the US and China, and in the UK, we will still have many more twists and turns before there is any resolution to Brexit.

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 Asia Pacific

Growth in China fell to its lowest level since 2008

We hear from Aberdeen New Dawn, whose chairman, Donald Workman, reflects on the trust’s six-month accounting period to 31 October 2019. The US-China trade dispute was crucial in shaping sentiment. The optimism that fuelled gains earlier in 2019 subsided after talks stalled and new tariffs were announced. Other emergent geopolitical issues – including the Japan-Korea dispute, the unrest in Hong Kong and events in the Middle East – also unsettled markets. Donald adds that continued monetary easing, from central banks globally, helped stocks avert deeper losses, as weak exports and lower factory output compounded worries about slowing global growth. As well as cutting interest rates, several governments turned to stimulus tools, such as tax cuts and extra spending, to offset the downturn. Touching on India, Donald noted that structural reforms and growth-friendly policies continue while a much-welcomed corporate tax cut could be a near-term fillip for business sentiment and the economy.

We also hear from the managers of JPMorgan Asian, who note that in China, economic growth went into reverse, falling to its lowest rate since the global financial crisis of 2008 and domestic demand softened. They go on to discuss thematic opportunities around Asia, noting that penetration rates of financial services remain low and favourable demographics, urbanisation shifts and growing middle class populations provide great growth potential for wealth, insurance and mortgage products, as well as for broad-based retail banking services. The managers’ base case for 2020 is slower but still positive economic growth that should be supportive for Asian equities.
Elsewhere, Schroder AsiaPacific’s belief is that earnings growth expectations look too sanguine for 2020, and this will feed through to dividend out-turns. The manager’s report goes on to add that many pieces of the jigsaw for recovery might fall into place (trade truce, recovery in Western economies, re-stocking, a return of corporate confidence) but these are not their central expectation.

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 Technology and media

Size of the addressable market for fintech could potentially be over $4 trillion

Neil England, chairman of Augmentum Fintech, says the opportunity for fintech remains considerable and that the sectors the company is targeting have an addressable market of over $4 trillion. He notes that the penetration of digital disrupters remains small. Neil expects this to change over the next ten years as while many of the core financial systems and players remain fundamentally the same as they did 10 years ago, the next decade is likely to bring considerable change. We also hear from Polar Capital Technology’s manager, Ben Rogoff. He says that fundamental improvement was most apparent where it was least expected, with Apple and the smartphone supply-chain delivering some of the best returns over the trust’s first half. Ben takes us on a tour-de-force of the global technology industry, including several anecdotes such as the fact that nowhere is the collision of virtual and real worlds more apparent today than in our selection of life partners with around 40% of people meeting online today as data and artificial intelligence disintermediate friendship.

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 Infrastructure

Clean energy generation no longer seen as a purely defensive investment

Jean-Hugues Lamaze, the manager of Ecofin Global Utilities and Infrastructure says that the adoption of climate change targets such as ‘carbon neutrality’ and ‘zero emission’ by an increasing number of countries and companies bodes well for an acceleration in the development in clean energy. Unlike in the past when the power generation sector was seen as purely defensive, the trust says the clean generation universe in particular has shifted to providing predictable growth, an attractive feature in uncertain times and a strong support for stock values. Economic infrastructure shares, in the manager’s view, still look undervalued relative to the bond market, to their own solid fundamentals and growth prospects, and to the valuations that private equity operators are ready to pay for comparable assets.

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 Royalties

Proven songs now a comparable or better alternate investment than gold and oil?

Hipgnosis Song’s founder, Merck Mercuriadis, reflects on the latest results from results from Spotify and Apple, which continue to highlight how the world has changed the way it consumes music. Merck says that streaming growth, both in the Western world and emerging markets, is driving proven hit songs revenues and therefore drives values up. Most excitingly with forecasts of 2bn paid subscribers by 2030, we are only at the start. He goes on to say that the songwriter is more responsible than anyone for the success of an artist and the music industry in 2019 and they and their songs must be properly recognised. With investors needing uncorrelated assets more than ever, and proven songs producing reliable and predictable income, the new asset class of proven songs is, in Merck’s view, now more investible than gold and oil.

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 Other

In a bumper issue, we have also included comments on North America from Gabelli Value Plus+; Europe from JPMorgan European Smaller Companies and JPMorgan European; Japan from Atlantis Japan Growth and JPMorgan Japanese; China from JPMorgan Chinese; India from JPMorgan India; Brazil from JPMorgan Brazil; debt from Henderson Diversified Income; leasing from Amedeo Air Four Plus; biotech & healthcare from Polar Capital Global Healthcare; environmental from Jupiter Green; renewable energy infrastructure from Gore Street Energy Storage and SDCL Energy Efficiency Income; infrastructure from Infrastructure India and commodities and natural resources from Polo Resources.

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 Full version

Click on the link at the bottom of the page to access the full report.

Kindly sponsored by Polar Capital and Allianz

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January Economic and Political Roundup