Monetary policy has been kind — but change is coming

Companies are concerned, but consumer confidence is holding up well

John Redwood  


“Change has got to come” said the UK prime minister in her recent conference speech. She was making an unexpected foray into monetary policy. She criticised the idea of creating more money and driving rates down lower. She reminded us that this helps the rich who own bonds and shares, but hits the modest saver who gets very little reward for holding deposits and savings bonds. It makes it dearer for people with no wealth to buy a property or other assets, with big consequences between the generations.

Her speech came after the event of the Bank of England driving rates down lower and buying more bonds, one month after the referendum. It did this despite the acceleration of money and credit that was occurring naturally without further central bank stimulus. The decision meant the pound was pushed down further and inflation was raised as a result. Why?

The BoE said this action was needed to offset a possible fall in confidence. Some large companies remain concerned about future investment, but consumer confidence — the biggest part of the economy — was holding up well. Perhaps the BoE will think again and not press ahead with a further rate cut and more quantitative easing. World bonds generally are sustained by all this official buying.

Recently, I was speaking to an investor who complained that the return on their deposits was derisory. I pointed out that their portfolio had risen in value by more than 10 per cent this year alone, as they were in the fortunate position of having wealth held in bonds and shares.

Monetary policy has looked after the rich more than the small saver. It has also been very kind to the FT fund.
The fund continues to do well, with a return of 14 per cent for the year so far. UK assets have done well since the Brexit vote sell-off, reaching new highs, and Asian assets have had a good year. Given the global background of modest growth and plenty of competition chipping away at prices and margins, my mind has turned to locking in some of the gains.

The FT fund, like other balanced investment funds, has enjoyed a bonus on its overseas investments from the fall in sterling which has boosted the performance of exchange traded funds. It is unlikely the bear raiders of the pound have finished yet, though there are now record levels of shorting. We know from past experience that currencies can overshoot when the market gets a mind to drive them one way or the other. We also know that late speculators to join a bear raid can lose a lot of money.

I decided to take the profit of 30 per cent on the FT fund’s holding in Korea (MSCI Korea ETF). The news from Samsung is unhelpful. While the damage has been done to just one of their phone products, it will take time for the company to rebuild its brand and reassure present and future customers. Samsung is around one quarter of the South Korean index, and an important standard bearer for corporate Korea generally. Similarly, when Volkswagen fell into difficulties with its diesel engines that acted as a further damper on the German market (which had been falling before the announcement).

I also took good profits on the FTSE 100 which I bought immediately after the referendum on the big markdown on the result. The market soon rose to new highs, shrugging off the vote. I have put the money from these sales into a general world shares fund for the time being, as this should be less volatile.
It also allows me to buy an ETF which offers currency protection. The sharp falls in the pound have taken the UK currency down to very competitive levels. At some point you would think the UK authorities will want to say or do something that stabilises the currency. They have been very tolerant so far of massive short positions against sterling. Their narrative has both predicted it and expressed a relaxed attitude to it. While a bit of devaluation may help make a country more competitive, too much of it becomes inflationary and eventually requires the response of higher interest rates.
There may be another downwards push by the speculators. There could also be at any time a sharp upwards correction, when sterling bears worry they could start to lose money on their extended short positions and rush to close them. Portfolio management is about a balance of risks, where taking profits on a good investment decision locks in an advantage whatever happens next to the asset you are selling. It is true you need to be careful with what you then do with the money. The fund had a lot in foreign currencies, so I think it is time to cut back on that risk.

As we expected, the UK economy has held up well this year, and is now forecast by the IMF to be the fastest-growing of the major economies. Money and credit growth has been good. The rate of job creation has been satisfactory, and property has performed well. The surveyors and economic pundits expected a sharp collapse in confidence and a fall in commercial and residential property prices. They are now revising their forecasts upwards again.

The news from the housebuilders is positive, with rising levels of interest and reservations. Most are reinstating their plans for 10-15 per cent growth in output. House prices have not fallen. Commercial property remains well bid both by people wishing to be tenants and by buyers of buildings. The stock market has discounted this brighter outlook, hitting new highs.

Many domestic buyers and tenants need new or extra space and are pressing ahead with their plans. Foreign investors now have the opportunity to buy UK property and other assets at bargain levels thanks to sterling. No wonder the property market has defied the gravity of pessimistic valuers.


John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. john.redwood@ft.com



John Redwood’s FT Fund — October 2016
 
Security
 
% Assets
 
iShares GBP Corporate Bond 0-5 ETF11.9
iShares Sterling Corporate Bond3.7
L&G Short Dated £ Corp Bond Index I Acc12
iShares Global High Yield Corp Bond GBP Hedged ETF2.9
L&G All Stocks Index-Linked Gilt Index I Acc8.5
iShares Global Inflation Linked Government Bond ETF8.9
SPDR S&P UK Dividend Aristocrats ETF2.4
db x-trackers S&P 500 UCITS ETF (DR) 2C (GBP Hedged)2.9
iShares Nasdaq 100 ETF7.1
PowerShares Nasdaq 100 ETF2.7
WisdomTree Germany Equity UCITS ETF — GBP Hedged1.3
Vanguard FTSE Japan ETF4.1
db x-trackers MSCI Taiwan ETF1.9
iShares Asia Pacific Select Dividend ETF2.3
db x-trackers FTSE China 50 ETF2.8
iShares MSCI World Monthly Sterling Hedged9.9
iShares FTSE EPRA/NAREIT UK Property5
iShares FTSE EPRA/NAREIT Asia Property4
L&G Global Real Estate Dividend Index Fund (L Class Acc)2.9
UBS CMCI Composite UCITS ETF A-acc2.6
Cash Account [GBP]0.2

Source: Charles Stanley Pan Asset

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