Forward glance - February 2018
The February edition of KMG's forward glance
February – Forward glance
Our latest Forward Glance Strategy Report illustrating the Medium portfolio for February 2018
1st November 2017 – 31st January 2018 – gross return (since inception)
Strategy report – February
At the meeting of our investment committee at the beginning of February the stock market reminded us all that, with the first significant drop in value for over two years, the past 24 months of steady growth is not the norm. Markets rise and fall, at times by uncomfortable margins, but they have also continued to return real value to those who are prepared to wait.
Volatility and inflation
The press is full of sensational stories and it is for us to set aside such things, some of which is pure speculation and some of which is short-term reaction, and to not get carried away and to remain focussed on those ideas that will do their job over the years ahead.
For a long time now, the call has been for a return of more normal interest rates, wages and inflation. Why then, at the first sight of this happening, has the market taken flight? It is good news. Wages rise, people have more money to spend, company profits increase as does investment and productivity and so the economy flourishes. The central banks raise interest rates to prevent inflation from getting out of hand, by bringing down the amount of money in the economy.
Perhaps it is not the prospect of rising interest rates, rather it is the worry that this will happen too quickly to allow people, companies and governments to adapt. Since this has been at the heart of many recent recessions, it might be a reasonable fear but not one that we think likely at this point.
The global economy
The fundamentals are still in place, with low unemployment, high company profits, low taxation, interest rates and inflation.
Donald Trump is increasing the US government debt to fund his America First policies, while reducing the tax rates for millions of his fellow countrymen. The US will not be alone in their spending requirements. Demands on public infrastructure around the world are simply enormous. In the UK we have one-off ideas of HS2 and Crossrail, but Governments around the world will need to invest vast fortunes in their buildings and their people, and rightly so you might well say.
For it to work, they are praying that inflation and interest rates do not rise too quickly. It will be financed by printing more money but without such financing, the division between the educated and the uneducated, the haves and have nots will continue to grow. Social dislocation remains, in our opinion, the fundamental danger staring back at us from the future.
We then look across to the continent and the upcoming Italian election next month and it is hard not to see this as a major stumbling block for the EU project. The leading party wants a referendum on their membership, but the most likely outcome is grand coalition that is almost completely impotent.
Further afield, the Pacific economy motors on. Australia and New Zealand are much more concerned with the continued growth in China than with Brexit and subsequent trade deals with a small nation half way around the world.
In summary, there are two concepts that we take with us:
- That volatility within the market is normal. Valuations do not go in only one direction, but this does not mean that we are witnessing a new economic paradigm
- To invest through KMG means to take a long-term, measured and thought out approach.
Our strategy, evolving as it does, has again proved effective in avoiding significant difficulties in the market, both in terms of declines in valuation and in avoiding investments where liquidity has been restricted as a result. We are well placed to continue to benefit from the economic growth around the world and that is why we have decided not to make any changes to your portfolio at this moment.
The medium portfolio offers a diverse fund range with the aim of achieving capital growth over the longer-term. The portfolio has the ability to invest in a broad range of investments on a wide geographical basis. Equity exposure within this portfolio will vary between 50% – 70%.
Contribution to performance by fund – 1 year
1st August 2017 – 31st January 2018 – gross return (six months)