Investment Performance – August 2019

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Investment commentary

Our August investment committee met shortly after the USA’s Federal Reserve announced a cut to interest rates of 0.25%. Clearly this was not enough for President Trump and his belief that a stronger dollar was working against the USA, and that “bigger and faster” cuts would help the economy. There is some truth in this; albeit there are also reasons why the US dollar has appreciated against the renminbi, the euro and sterling in particular. It is also no coincidence that he is building up towards his re-election campaign and a positive economy, most markedly shown by a buoyant stock market. The entwining of economics with politics, often facilitated by the social media revolution, continues despite history showing that it has not been a success in the past. 

Under pressure from politicians, central bankers have been pumping money into the system via quantitative easing (QE) to maintain the ten years of growth that global markets have so far sustained since the Global Financial Crisis.

This has created a new world of investing in which bad economic data can be received positively because financial markets assume it will lead to more QE or more sympathetic monetary policy. We are still incredibly worried by the amount of debt in the world, with some $15trillion now yielding a negative return to investors. It is incredibly difficult to see how this will be unwound successfully and we would prefer not to be involved when it does. In KMG’s portfolios, we keep our exposure to debt modest and we prefer to hold a larger amount of cash instead to allow us to take advantage of future opportunities.

Rebalance

At our last rebalance we reduced our exposure to UK property mainly due to concerns about liquidity in relation to Brexit. We also switched some of our thematic investments, moving away from the ageing population fund whose underlying themes of healthcare and financials are covered elsewhere in the portfolio, and instead increased exposure towards modern themes, including artificial intelligence.  

Markets are volatile, as we have seen at the start of August. We work to maximise diversification and minimise the downside risk but also emphasise that in times like these you should be holding a good cash buffer to see you through extreme market events, allowing you to ride the wave, wait and give yourself the best possible chance of seeing values recover.