“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.