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Investment Opinion from John Townsend

John Townsend's investment opinions June 2017

Henry Ford was right. A prosperous economy requires that workers be able to buy the products that they produce. This is as true in a global economy as a national one. - John Sweeney

Despite all the happenings in the political world, now is actually an excellent time to invest in equities. The financial crises happened 10 years ago and companies are once again running profitably and investing. International and domestic trade has picked up again and there is no point - at all - in investing in the fixed income markets or keeping money with the banks where the returns are negative. Investment in real estate for letting, which is in or near big cities has become wildly over-priced, is incredibly inflexible and is no longer a profitable alternative.

It is the loudest trumpet that most often has the least meaning. The United States of America under President Trump is fast losing its credibility as a world power. The Russians, Chinese and Saudi Arabians, having learned that flattery was extraordinarily productive in gaining the friendship and attention of Mr. Trump, soon realized that the benefits of such flattery had only a short life span. Mr. Trump seems be growing old disgracefully; one can use the analogies of the Queen of Hearts in Alice in Wonderland (off with his head) or the Emperor's new clothes by Hans Christian Anderson, where the courtiers are too afraid to say that the emperor is, in fact, naked. Then there is Shakespeare's play the tragedy of Julius Caesar where a dominant and arrogant Caesar is murdered by his courtiers. Each work has its parallels in the court of Donald Trump. The effect on the outside world is however minimal.

Mr. Trump's announcement that the United States of America is to walk away from the Paris climate accord has much to do with the fact that this agreement was negotiated and signed by former President Obama. It makes absolutely no economic or social sense at all to leave the accord and merely leaves the way open for other countries to fill the economic and leadership void left by the US departure.

The US president was elected on a populist ticket. The result is, disappointingly, anything other than populist; the actions suggested so far are those that will exclusively benefit the American elite. The next big question is how the midterm elections will affect support for or pressure against this president and whether US politicians will take the chance and insist on a change at the top before then.

Within the presidential medieval court in Washington, there seems to be chaos with policies being announced off the cuff by the president using Twitter, even if this directly contradicts the statements and efforts of his ministers. Many of the administration's more senior positions remain unfilled and stories about fits of rage and tantrums in the corridors of power abound. Policy is not being made in the White House; it is up to individual members of the Senate to guess the right moment to present their measures to the president or his coterie of close advisors. In the end however, little or nothing is being accomplished.

President Trump has yet to have a single success story in his tenure so far. His aim seems to lie principally in trying to remove the measures passed by his predecessor, President Obama. In order to do so however, there has to be a willingness on the part if the entire Republican Party to support him, but this is simply not there. Overseas, the high point seems to have been the awarding of a big shiny gold medallion from the Saudi King to Donald Trump upon his arrival in Saudi Arabia. This was followed by the signing of an agreement in principle for a 110 Billion Dollar 10 year arms deal, which is at present being held up by the Senate Foreign Relations Committee's refusal to give permission.

At the end of the day what actually matters to investors is the fact that the US economy is performing well and that US companies are profitable. It has taken about 10 years for industry and the banking sector to recover from the market panic of 2007 to 2009.

The defeat of so-called Islamic State or Da'ish in Syria and Iraq has little economic consequence, but is more emotive. A caliphate, or territory under an Islamic steward, was declared in Mosul by Abu Bakr al-Baghdadi, the nom de guerre of Ibrahim Awad Ibrahim al-Badri, with himself as caliph in 2013. Before its final defeat, Al-Baghdadi ordered members of Da'ish to form their own one, two or three or person caliphates wherever they happened to be in the world. These have been ordered to destroy society wherever they find themselves. The weapons to be used are anything that comes to hand, with vehicles, bombs and knives being specifically mentioned. Very few young men and women will finally heed the call, but some have and still will and there will be enough for the security forces to worry about particular targets; otherwise the main aim is to destabilize western society.

The myth of Arab brotherhood in the Gulf Area is becoming apparent in Qatar, where the country is being isolated and pressured by its conservative Sunni neighbours led by Saudi Arabia. The aim is to force Qatar to cut communication with Shi'ite Iran and to curtail the freedom of the more or less independent press. The Saudis have been emboldened by the support they believe has been promised them from the US president supported by his son-in-law Jared Kushner, however short lasting this may be.

In Europe the economic picture is also looking positive. Despite Brexit, many European and British companies are showing increased profitability are expanding and are paying dividends, all the better to meet the investors' demand for risk assets offering a positive yield. Economic growth has returned, albeit in parts in Germany and is expected to appear in France under the new President Macron. Corporate efficiency is improving with costs being kept under control. At the opposite extreme, in Italy and Greece, the upward pressure on wage costs reinforces their uncompetitive position. The Italian and Spanish banking systems are also in a very weak state. This conundrum can only be solved by a two tier European Economy with two separate currencies. Uncertainty also arises from the forthcoming Italian election where a populist and anti-European party is gaining strength and must be reckoned with.

In the United Kingdom, a needless and incredibly badly handled snap general election has left the present ruling conservative party with a minority government, supported at present by a small Northern Irish party. The present prime minister Mrs. May has run out of her own feet to shoot into and is unlikely to last much beyond the autumn party conference where she will be expected to 'do the right thing'. Not only that, the present government is filled with characters more often found in a kindergarten. On the other hand, to allow the left wing Labour Party leader to run the country with populous messages that make absolutely no economic sense and seem to be dependent on spending money which does not exist would be a disaster. Mrs. May with an astonishing lack of skill has plunged the country into chaos just at a time when it needs to focus on negotiating even a halfhearted exit from the EU.

The conservative British government must now be seen to be supporting British Industry and the financial sector, something it had ignored in its political machinations. The British economy is still surprisingly strong, though there is cause for concern with a government that is woefully weak.

China is seeing subtle but important changes. The Chinese central bank is clamping down on the export of capital for foreign investment, while also putting pressure on the domestic secondary finance markets. The Chinese expected growth in GDP is expected to be between 6.5 and 6.7% in the present year.

There are two important developments in Chinese policy; the first is the Belt and Road initiative, a development strategy proposed in 2013 by the Chinese president Xi Jinping. The Silk Road Economic Belt and the Maritime Silk Road focus on the economic links between Europe and Asia as well the ocean-going supply routes which will provide China with a source of necessary imports. 'Belt and Road' is a long term project and is made possible by the Chinese tradition of long-term leadership.

The infrastructure initiative covers mainly Asia and Europe, but also includes Australasia and East Africa; it will include investments of up to 8 Trillion US Dollars and will ensure that China has the necessary import of raw materials for its industry and the necessary transport means to export its industrial production. Politics aside, there will be a significant future for Chinese industries.

The economic crisis of 2007 - 2009 has passed, the global economy has recovered and companies are thriving for the right reasons. At the same time there is no sense at all in investing in Government Bonds or putting money in the banks, which pay negative or very low interest rates, are themselves not customer friendly and are in need of reform. The only real alternative for private investors is to invest in very carefully chosen equities, using fund managers with a proven track record of managing risk and diversifying markets as widely as makes sense.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.

Townsend@insure-invest.de
www.insure-invest.de

John Townsend's investment opinions February 2017

Circus Ringmaster :-"Ladies and gentlemen! We will now present for your entertainment the most stupendous, magnificent, super-colossal spectacle! On this tiny, little, insignificant ball, we will construct for you a pyramid! Not of wood, not of stone... a pyramid, of ponderous, pulsating, pulchritudinous pachyderms! I give you the elephants."

President Trump enjoyed the campaign trail leading to the Presidential Election and now has the appearance of a circus ringmaster with top hat and bright jacket and tie, still wishing to play to the crowds. It is unusual to have a western democracy governed by decree, more unusual still to have a country where policy is partly controlled by two unelected individuals, in this case Stephen Bannon and Stephen Miller, both of whom have a capacity for promoting 'alternative facts'. A thin skinned and paranoid president with the reputation of having a dislike of detail, a short attention span and only wanting to accept good and indeed fake news being filtered to him by his aides, Mr. Trump's advisers will carry an unusual amount of power when he acts as a mouthpiece for their views. President Trump's rhetoric is full of bellicosity but contains very little actual detail. His actions will for the most part have to be sanctioned by the two US elected chambers of Congress. The project costs suggested so far are reminiscent of a spendthrift suddenly having access to someone else's money; Mr. Trump's track record in this regard with his projects in Atlantic City using borrowed money is not exemplary.

Despite the above, this is an interesting time to invest in US Equities, not because of President Trump and his policies, often called the Trump surge, but because the economy and the companies themselves are doing well. Indeed after a difficult and at times confusing 2015 and 2016, the US economy is very positive. The Trump election has brought with it a rally in the US equity markets, which rally would probably fizzle out if it were not for the underlying economic strength.

President Trump has promised tax reforms including sharp reductions in the corporate tax rate as well as economic stimulation including greater (and sorely needed) investment in infrastructure of up to $1 TRILLION. (For the sake of clarity, a Million Million dollars). This is in addition to the additional $54 Billion he wishes to spend on the US armed forces. This latter sum sounds impressive, until it is remembered that President Obama had already requested an additional $38 Billion in defence spending. The larger sum seems to be an uncalculated figure, chosen because it was larger than the plan of his predecessor. President Trump is also insisting on building a wall along the border with Mexico, which is over 3000 kilometers long. By comparison, the Berlin Wall was a mere 160 kilometers long. Recent estimates suggest President Trump's wall will cost over $21 Billion. It is unclear whether these election promises will or can be met; but if they are, the big engineering companies especially will benefit.

On a different level, The Federal Reserve, the US central bank, has already signaled that it proposes up to three interest rate increases in 2017. The Fed is by design independent of the US Government and it is likely that these increases will occur. Such moves will bring back a measure of inflation and begin to bring an end to the financial repression which has existed in the US and in Europe.

Low global interest rates producing zero or negative yields have allowed a heavy issuance of debt by companies. Demand is now available to buy this debt in large amounts. The issuing companies have of course to pay a risk margin on top of the base rate for their new debt, but this is relatively small. International institutions have a problem with the fact that government debt has a largely negative yield; the insurance company trustees do not allow them to invest in large amounts of equity; they therefore have instead to find bonds to fill their investment requirements. Interestingly, the gap between the margins between AA and BBB debt has shrunk to very low levels, reflecting the reality that the default levels in the investment sector are universally very low.

The price of oil has risen, albeit slowly. The increase from a very low level has clearly had an impact on reported inflation, but it is important to recognize that the inflation surge will pass by the end of 2017. If one wishes to wait that long, the economists from Flossbach von Storch suggest that price of oil per barrel could reach $80 in about 5 years. This is of course unhelpful to those countries reliant on oil exports, but is manageable to those oil importers.

In Europe, the markets for Pan European equities have performed relatively weakly. There are indeed good and profitable companies in Europe, but the economic and political uncertainties give investors cause for concern. A presidential election in France, with the possibility of a president who is hostile to the European dream, a general election in the Netherlands with an equally populist potential winner who is also hostile to Europe and the (almost) certainty that the United Kingdom will initiate a withdrawal from the European Union under Article 50 of the Lisbon Treaty, (A Brexit) all give cause for concern. Greece is still a major problem, but the willingness amongst European leaders and bureaucrats to cut Greece loose from economic strangulation and the crippling debt means that more money will be poured into that particular drain.

The British Economy is performing well and has a higher growth than the average for Europe as a whole. Germany and the northern European countries are flourishing economically, as much due to a Euro currency which is too weak for their economies, as much as it is too strong for the southern countries. There is no willingness on the part of the European powers that be (not leadership, there is none) to discuss such problems. Now is therefore a good moment in history to invest in German and related equities.

Japan has suffered for more than two decades under the economic shocks resulting from a burst asset price bubble and poor lending quality based on a corporate and social system which was followed blindly. This collapse also caused a great loss of self-confidence in companies, banks and their employees. Despite high national debt, low global interest rates have allowed investment to resume. The three arrows of Abenomics, aimed at reducing Japan's chronically low inflation, battling low worker productivity when compared with developed countries and the expenses of an aging population, have slowly taken hold in a country where change is regarded with deep suspicion. Now seems to be a good time once again to renew investments in Japanese equities.

In China, economic growth has slowed to some 6.8% a year, better than had been expected. Although Chinese national debt is high, most has been taken up by the private sector. This could bring problems to a very large secondary finance sector, but Chinese industry seems strong and has many opportunities.

A relatively new sector for investors lies in the Frontier Markets. These are countries which are smaller than even the emerging markets but have economic potential. The risks, both political and economic are higher and it takes a great deal of careful analysis in order to understand and manage the resulting risks. Potential rewards are however high for skilled analysts. It won't be long before unskilled analysts from the big fund managers find their way to this sector and take unacceptable risks. Therefore investors should watch the original skilled analysts and not allow themselves to be seduced by unproven new competition.

To conclude, equity markets are becoming stronger, especially in the United States of America and Northern Europe, with a stronger economic support for the business of large US corporations that are already showing profitability. German companies too are in a strong position. The Equity markets will always fluctuate, nature has no straight lines, nor does investor sentiment, but the trend is important. The fixed income markets should be avoided as much as is possible outside the needs of a diversified balanced investment portfolio, until they show a much greater yield.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.

Townsend@insure-invest.de
www.insure-invest.de