Forward glance June 2018

The June edition of KMG's Forward Glance


June – Forward glance

Our latest Forward Glance strategy report illustrating the medium portfolio for June 2018

1st November 2011 – 31st May 2018 – gross return (since inception)

Strategy – June 2018

After almost a decade where central banks created money out of thin air and used it to support the global economic system, talk has turned in recent months. Now it is much more about how central banks tighten monetary policy after years of quantitative easing and low interest rates.

If this era, which has been the single most important support for asset prices from houses to art, comes to an end and normalisation takes place, what will happen?  Two questions arise, the first is whether we are actually on the brink on such a fundamental shift in policy, while the second is what effect it will have on the global economy: will it simply reduce prices in the opposite effect that pumping money into the system had in the wake of the financial crisis? Possibly yes, but how likely is it that this fundamental support will really change? Think about the following worrying facts:

  • 25 million Britons have less than £1,000 of savings
  • 19 million Britons have less than £500 of savings
  • 16 million Britons have less than £100 of savings.

As a nation we are extremely poorly prepared for a change in monetary policy. We have very little in the way of savings and live hand to mouth for the most part. So yes, the withdrawal of financial support and rising interest rates could have the dramatic effect of reducing the value of everything, unless the supply of money from other areas (think wages and credit), whether in traditional currency or in new barter or crypto forms, is not sufficient to make up the difference.

In spite of this risk, we remain far more upbeat on equities – if upbeat is the right word – than on most other asset types. Upwards is the desired direction of travel for interest rates, but it will be at an unbelievably glacial pace.
We can imagine it might very well be another ten years before interest rates in the UK return to anything resembling ‘normal’, and that we may have to accept months or even years where inflation rises more quickly than wages or interest rates.

Italy and the EU
Like it or hate it, BREXIT remains at the forefront for many. Italian politics has shown again that the EU is in a dire need for reform, without which it is at risk of failing once and for all. Yet another slow-moving entity, but when we look back in ten years’ time it will either be very different, or it will not be there at all.

It is also difficult to imagine that when push comes to shove, the wealthy EU nations, through the ECB, will cease their financial support having already pumped so much financial support into the region already (to the extent that it would threaten the entire banking system).

The Italian affair highlights this perfectly. An agreement between two popularist parties, to the far left and the far right, led to concerns over stability in Italy, and the Eurozone. A dramatic reaction followed, with investors fleeing the Italian market. By the end of the week, despite the same two parties remaining in a power share, markets were back where they started. Had you gone away on a weeks holiday, you might very well have missed the entire episode.

Perhaps this is our fundamental sentiment, if it isn’t about demographics or about technology (and a good many things are if you think about them), then it is probably less important to your long-term investment returns than you think.

Our conclusion
We have chosen not to make any further changes at this point, having recently introduced some new funds and made some minor alterations to the discretionary managed investment portfolios.

With rates likely to remain incredibly low, with inflation fluctuating above the 2% target, our view on equities remains positive even though the fragile confidence will lead to volatility. Therefore, we conclude that maintaining our widely spread portfolio is more appropriate at this moment in time than focussing more heavily towards one of our themes than the others, but where appropriate we are using underlying investment funds that have a focus and mindset that is similar to our own.

Portfolio analysis

Investment objective

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

1 January 2018 – 31st May 2018 – gross return (six months)