
Discretionary Investment Report | Third Quarter 2017
Summary
In our quarterly report we look at the political and economic influences which have driven markets over the third quarter.
5 min read
The first three quarters of 2017 have seen good gains in share prices around the world, and with little rise in long term interest rates, bonds have also delivered positive returns.
The investment team’s optimism on the resilience of the economy throughout the recent storms such as Chinese slowdown, the Brexit vote and the arrival in the White House of Donald Trump seems to be playing out well. Closely watched leading indicators of the global economy point to accelerating GDP growth, from around 3.1% in 2017 to around 3.3% in 2018.
Perhaps the most pleasing aspect of this is the breadth of the growth. Whilst China and the US continue to make up the largest part of the gains due to their size, growth is picking up in places which had previously been written off, including Spain (where GDP is rising at a 3% year on year pace), Ireland (4%) and that the components of recovery have also broadened from consumer spending and government spending to include capital spending – companies are now confident enough in the future to go out and invest in factories, buildings and people.
Inflation has stopped surprising on the downside and is starting to rise slowly in most developed markets.
Of course, as investors we need something to worry about and from here, they may start to worry about policy errors. Policy makers, especially those central banks with all their lovely low rates and money-printing, have done a good job in supporting growth and preventing the 2008-09 recessions from being repeated. However, these same central banks are now getting confident enough in the outlook to withdraw some of the extraordinary measures – the Fed has raised rates 4 times in the past 2 years and will soon end the Quantitative Easing (QE or ‘money printing’) policies. The Bank of England will surely un-do the post Brexit rate cut and take us from 0.25% to 0.5% again. The European Central Bank will likely announce the end to their own QE program. And even the Bank of Japan – the inventor of Quantitative Easing during their ‘Lost Decade’ – is likely to withdraw some policy mechanisms.
“Sterling’s value doesn’t lie and is importing inflation that is already hitting consumer living standards.”
Could this seemingly simultaneous tightening upset markets? Raising rates and tightening policy could see financial system freeze up as central banks cool growth. It seems unlikely to be good for government bonds for example. However given the tiny magnitude of the moves, it does seem unlikely – Central Banks are incredibly wary of making mistakes and tend to target areas of concern through rules, rather than the scatter-gun approach of raising rates for all.
The other potential policy mistake could come in the opposite - fire. As amateur barbeque chefs should know only too well, throwing fuel on a lit grill is a recipe for disaster. And yet, despite big deficits and little sign of slack given unemployment is close to record lows, President Trump is looking to cut taxes for companies and consumers, and spend many billions of Dollars on infrastructure. Adding stimulus of this magnitude to an economy at this stage of the cycle could be dangerous – inflation could pick up sharply forcing the Fed the raise rates more than currently estimated.
The US clearly needs tax reform – the 35% standard corporate rate is far out of line with the rest of the world and simply encourages avoidance – and a trip to the US will confirm their airports, bridges and roads are in a very poor state. However, the political situation is quite difficult and most politicians are more conservative on the deficit than the more profligate president. As a result, similar to our feeling that an icing up of the system is unlikely, neither do we feel that we are about to burn upwards.
This relatively benign top-down picture is a good situation to be in for bottom-up stock pickers such as ourselves, who focus on trying to find good companies, not pay too much for them, and are patient to enjoy the benefits of compounding the growth of dividends and profits.
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Third Quarter 2017
KEY TAKEAWAYS
The first three quarters of 2017 have seen good gains in share prices around the world, and with little rise in long term interest rates, bonds have also delivered positive returns. However, the outcome of Brexit negotiations remains uncertain and raising rates and tightening policy could see financial system freeze up as central banks cool growth. At Adam Investment we continue to take a long term, diversified approach to investing on behalf of our clients.
About Adam investments
We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.
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