"There are years that ask questions and years that answer."
Zora Neale Hurston
How does the sudden snap general election announcement affect our approach to managing clients’ wealth? The answers are in the markets - and our Investment Team.
While Theresa May’s announcement came as a surprise to everyone, the aftershock in the markets signalled it was a good move. The pound shot up to over £1.28 to the dollar and there’s a general understanding; economies that are doing well and delivering efficiency tend to have strong currencies.
Gary Reynolds, CIO suggests currency and market responses are a sign that uncertainty in the UK will reduce in the long run. Sounds positive; the pound is up and there’s increased stability ahead - but the markets went down and while this might look concerning, it’s logical as Gary explains:
“The difference is lots of our big UK companies derive a lot of their earnings from overseas, which means if you’re converting euros, yen and dollars back to pounds when the pound’s weak, their foreign earnings are buying lots of pounds in their home country which is good for profits.
“If the pound becomes stronger, it reduces the level of those foreign profits, so the two are perfectly synonymous in terms of the logic of why they happen. Pound up, market down was simply a response to markets feeling that this was a good move for stability for the UK.”
Markets are fluid and there’s no real way of knowing what external pressure might affect how they shape and flow on a daily basis. Mrs May’s announcement is a prime example. Gary goes into some detail about the measures and strategies in place to reduce wobbles on the COURTIERS funds so they aren’t as erratic as the market overall. The strategy in place at the time of Mrs May’s announcement saw the COURTIERS funds managing generally OK with the UK Equity Income Fund in particular doing very well. Meanwhile the long dollar approach in place to hedge out some potential risks arising in the UK caught us out when the market suddenly reversed. Nothing to panic about – it hasn’t had a big impact and a rethink is in effect.
This is the nature of the beast. Only in our wildest dreams could every single day play out exactly how we imagine or want it to, so the Investment Team keeps a sharp eye on the markets and the general global landscape (currently very political), reacting and responding to whatever happens with the long run in mind. At the moment we’re looking carefully at where the sterling/dollar sterling/euro relationship might go over the next one to three years.
Politics Moves Markets
Politics is the most concerning issue at the moment and it’s the most difficult thing to accommodate because it can be so erratic. Who saw the snap election announcement coming?
That’s just at home. Global politics is the main driver to lots of market movements right now and this may well continue to be the case. It may settle in a year’s time. The present possibilities are simply vast and uncertain in the current climate so we’re on guard with eyes, ears and minds open ready to respond to whatever happens.
Time to Hunt or Protect?
Returns are synonymous with risk. A real return of 5% – 6% per annum from equities over the very long term isn’t possible without taking some risk. 2017 isn’t the same as 2011 when the markets were still scared witless over the global financial crisis in 2008. Situations like that in 2008 provide the very best opportunities because you can pick up assets nobody else wants to buy. You get really cheap fundamentals on good stocks. If you look at the returns from the COURTIERS Total Return Funds from 2011 onwards, they’re excellent. Way beyond what any of us imagined in that six year period up to 2017.
Today, share prices are higher than they were six years ago so when looking at what’s available, the opportunities aren’t as good right now as they were then. We don’t think there’s any chance of replicating the high returns we’ve enjoyed over the last 5-6 years, but do think there are opportunities in the markets. Looking at equities they still look fair value compared to what else you could put your money in such as government securities yielding 1% per annum over 10 years with no real compensation for inflation. You could have a basket of equities, which are currently nowhere near as expensive as they were in late ’99, and get dividend yields of 3% - 4%. Seems far more attractive. To sum up, we think it’s a case of being more careful with the opportunities while there doesn’t appear to be a case for being as bullish.
At the moment, for our Investment Team it’s a case of plotting a midway path, managing the possibility of some big market wobbles over the next year and minimising the impacts of those wobbles on the COURTIERS Funds.
We will continue to monitor the entire global financial landscape to help clients achieve their long term objectives.
When we heard the news that there was going to be a snap election I think everyone in the office was really surprised. I think it caught the whole country by surprise, but when we stopped to think about the reasons for it, it made a lot of sense.
The perception from the market is that this is a good move, will in the long run reduce uncertainty in the UK although in the short run, it caught everybody by surprise.
If you look at the way our own funds responded I think the fact that our Equity Income Funds hold what we hope are stocks that are for the long run – we have certain criteria we look for; not too much leverage i.e. they haven’t over-borrowed, good liquidity, good cash-flow generation, reasonable dividend yield, prospects to grow that dividend yield, then hopefully what we have with those stocks is that they won’t wobble as much as the market overall. Now that’s not always the case but a lot of the time it is the case and that generally was ok when this occurred, when the markets wobbled. In fact our UK Equity Income Fund did extremely well. But we are long dollar. We’ve been using dollars as a means of hedging out some of the risks we saw arising in the UK, so when you get a reversal like that, that’s when your hedge goes against you, so that caught us out for a couple of days. We need to rethink that, we’re not going to panic, it’s not a horrendous effect on anything and that’s just the nature of the beast when you work in this market – every day doesn’t go the way you want it to go.
It will certainly make us rethink and one of the things we’re doing at the moment is looking very carefully at where we think the sterling dollar sterling euro relationship is going to go over the next year – three years.
Politics is still the issue that we are most concerned with and as I’ve said in articles and in these chats previously, politics is the most difficult thing to manage for because one never knows what the outcome will be. Politics changes very quickly as we found with Theresa May suddenly going for a snap election – we just didn’t see that coming. There’s not really been any discussion about that in the past two or three months.
There’s a lot of turmoil around and that’s always a major issue and you have to look at that and what we’ve been trying to do is look at this just to say there is potential for big shocks and therefore you try and put some protection around the portfolios.
When you’re looking at returns in the Investment Team they are synonymous with risk. You don’t get a real return of 5-6% per annum from equities over the very long term without taking some risk. If you don’t want risk you sit in short term treasuries, short term UK government bonds, gilts, cash and then you get very little risk, as long as you haven’t put too much with an organisation that goes bust – you don’t get too much risk, but you don’t get the returns either so whenever we take risk, we are looking at what the payoff is for that risk, in other words will we get well paid for taking that risk – for accepting those ups and downs will we be well paid?
2017 is very different to 2011. In 2011 markets were generally still scared witless over what had happened three years earlier in the global financial crisis when Lehman’s went bust. If we’re at a level we’re going to get that we had the last six years, happy days. We’ll all be popping champagne and partying in five years’ time if we can repeat what we’ve done over the last five years, but I generally don’t think that’s going to happen.
Is the equity market outrageously expensive? Absolutely not. It’s nowhere near as expensive as it was in late late ’99 and everybody gets obsessed with what happened most recently. We call it snakebite. Walk through the grass, get bitten by a snake, I guarantee the next few times you walk through the grass you’ll be looking for that snake again. Snakebite. So you’ll always about the thing that got you last time. But with investment management, you’ve got to worry about the things that haven’t got anybody for a while. We’ve not had a bond crisis. We’ve not had a massive increase in interest rates for over 25 years. What if that’s the next crisis around the corner? What if bond holders are going to get wiped out, rather than equity holders. I think that’s more likely and that’s a risk we’ve been avoiding.
We still think that in the long run, we can deliver reasonable returns from what’s available in the market. We’re not out of risk assets, let’s be quite clear. We like risk assets for the long run, but what we’re trying to deal with is the possibility that you’re going to get some big wobbles in the next year.
At the moment it really is plotting a midway path and I think, that so far, bearing in mind the last year has had lots of interesting incidents mainly coming from politics – Brexit vote – Trump elected et cetera. then I think we’re doing OK with that, but we’ve got to be so mindful of the possibilities and we call that managing the tail of the risk, you know, the old standard normal distribution. You’re trying to manage the extremes so you don’t get caught out if there’s a major shift in the market.
Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.
We do not endorse nor accept responsibility for the content of any website not operated by COURTIERS which you may visit by following a link from this article.
Seminars & Events
Valuable live commentary on the latest investment views and news, delivered with a unique Courtiers edge.Info & Booking »