Transcript of Video:

1. Market Response to Theresa  May’s Appointment as UK Prime Minister

   The markets liked the appointment of Theresa May. They liked it a lot. The pound recovered, the FTSE 100 went up, and the general sentiment was that this is very, very positive. Now, this is a honeymoon period for her, and that’s a wonderful endorsement of her appointment by the markets. But just to put it in context – it couldn’t have got much worse could it? We had carnage politically in this country but the short term response has been good, and I think that is because she is seen as a competent politician that does the detail, is industrious and hard-working, and straight-talking. That is the type of person you’re going to need for what is probably going to be four of the most demanding years for any UK PM for decades.

2. Economic Implications of The New Cabinet

   On the whole the market likes Theresa May’s new cabinet. There were some surprises, there were some appointments that were to be expected. But I think the thing that is most impressive about the new PM’s decisions is that it looks like she’s thinking longer term. She’s thinking longer term I think for the benefit of the country and she’s thinking longer term politically. So putting David Davis, an ardent and long term euro sceptic in charge of negotiating the UK’s exit from the EU, means that if it all goes hopelessly wrong it falls on to the out campaigners. Putting Boris Johnson in the Foreign Office, also another out campaigner, who will be involved in different degrees with those negotiations, means that he’s got to ensure that the promises he gave that there will be a better life for the UK, outside of the EU, are realised. And that means that Mrs May as a remain campaigner can always shift that blame if things go wrong onto the out campaigners. Now I don’t blame her one jot for doing that because one of the issues I had with the campaign for leaving the EU, was that it never really addressed the nitty gritty of the issues. It was fought mainly on sovereignty and immigration. But the truth is, what is the effect on the economy if we lose access to the free trade in Europe? And if there is a hit on the economy, we’re all going to be poorer for it. So it needs to be negotiated in some detail now, and we need to start thinking about how these decisions affect the economy on a day-to-day basis.
3. UK Interest Rates – Why No Change?

   In markets I think the actions tell you a lot more than the noise. So I thought it was likely that Carney and the Monetary Policy Committee (the ‘MPC’) would cut rates this week. The fact that they didn’t is because they had seen that the short term panic wasn’t as bad as expected. And in fact there were positive responses to having a PM in place, because remember before Leadsom stood down there was uncertainty about who would be the new PM and when they would be appointed. So that cleared up straight away once Theresa May got appointed, and the market response was very positive. So I think the MPC. was able to catch their breath and think, ‘do we really need to cut rates or not?’ and if they don’t have to they won’t. And the reason is simply that rate cuts of a quarter percent are not going to make very much difference, and there’s not much left for them to cut after that – do we go to zero? Do we go negative? So I think they’ve done the right thing – it gives them a few weeks, they’ll take another decision next month. But it does mean short term that, at least as far as the Bank of England is concerned, things were looking a lot better at their meeting than they were in the weeks leading up to it.
4. Confidence Outside the UK

   I think we’re generally unpopular amongst other EU members, at least the people that are in charge. I think they now accept that this is just a problem that’s going to be dealt with, but I think the way in which the rest of the EU – because we are still currently a member – sees the UK, is not in the way we see the risks. We see the risks from a failure of the economy, that you either get a one-off hit where we perhaps lose 2-3% of GDP (Gross Domestic Product) and then go back to a normal rate of growth. Or we have a reduced rate of growth for a long period, or, and what is probably the biggest risk for the EU is that we don’t have a reduction in GDP, but our rate of growth actually accelerates. What that will do is probably finish the EU off, because it will give the confidence and the courage for other EU members to ditch the federalisation experiment and want a completely new negotiation. So the way in which European leaders look at us at the moment – if you gave them the choice, I dare say a lot of them would be delighted if we hit recession with rising unemployment, because it would deter the other members from taking a similar path to the UK.
5. Global Risks

   There are a lot of risks in the world at the moment. Now I hasten to say before anybody looks at this and gets thoroughly depressed after I talk about what’s coming up over the next year, that there is an old saying that “the markets climb a wall of worry”. There is always something bothering us, and possibly the thing that should always bother us the most is when we haven’t got much to be bothered about. Because that’s when confidence is riding high. You know as Shakespeare writes in Macbeth, “security is mortal’s chiefest enemy”. Put it another way – pride comes before a fall. When you’re not looking for the risks, that’s when you are most at risk of walking into something that’s devastating. So, one could be optimistic on the basis that there are so many things to worry about. Italy’s banking system which was never cleaned up after the 2008 credit crisis, is in a mess, and because EU rules prohibit governments from bailing out their banks unless the bondholders have taken a hit, Renzi, Italy’s PM – because Italian bank bonds are held by ordinary Italian savers, can’t under the current EU rules bail out his own banking system without hitting ordinary Italian savers, which will cost him his premiership. So I suspect you’ve got a fudge coming on that one pretty quick. Then we’ve got the election of a new US president, with both Hillary Clinton and Trump lurching towards protectionism. If that happens then that’s going to dent free trade which is going to make the whole world a little poorer. And then next year we’ve got major elections in France and Germany, and in France certainly there’s a resurgence of support for Le Pen and the Front National, and it won’t have been lost on the French that in the polls they disliked the EU even more than we did. So if they had a referendum the chances are France would jump the way we’ve gone by a bigger margin. Now that may be a good or bad thing economically in the long term depending on your perspective, but it is certainly going to cause some short term turmoil. But there is some decent news around. The US economy is doing reasonably well. Core inflation is above 2% in the US, and has been for some time, and it’s beginning to look like perhaps we are getting to a point when this long term low interest rate period will come to an end. It will come to an end because economies are picking up which will be very good for investors who will be able to look forward to getting better term returns on their money in the future. However, if you’re holding long bonds, beware, because as those interest rates shift, you’re going to take a pasting on your bond price.

6. Courtiers Portfolio Performance and Investment Approach 
   This is the most difficult time for running client money. Political risk is off the scale in terms of the complexities it creates for us as analysts and asset managers. So, we constantly look at the outcomes. I always think it’s very important to look with your eyes and listen with your ears to what’s happening on the market on a day by day basis, but alongside that we use some quite sophisticated models which can create stresses of different things happening. So we were running a double stress test coming up to the referendum. One was Brexit limited contagion, one was Brexit with wider contagion. We knew there would be short term hits to asset prices in Brexit either way, and it happened. We covered that off because we believed the dollar would be safer and would rise in value against the pound, and on the Friday that the referendum happened, our portfolios went up in value. That was great. So we’re keen to try and engage the next risks coming up, with strategies that can help get our clients’ assets through them. But whilst we’re doing all that we’ve got to be mindful of the fact that, what if the world navigates its way through these problems? Well, what if new inventions and productivity suddenly starts to kick in again? You’ve got hundreds of years of evidence showing that mankind is an extraordinarily innovative race that will keep creating new tools and new services in an ever-improving fashion. What if all this happens and what if then share prices go up a lot? If we’re overly cautious we miss the rise. If we’re overly optimistic we get hit by the downs. But that’s what running money is all about. In the end when its times like this, you don’t take big bets. You diversify as much as you possibly can, you cover off wherever and whenever you can, and you keep the portfolio so that it will benefit from rising prices, and that is what we will be doing for the rest of the summer.

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