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Investment Opinion from John Townsend

The US presidential election in November 2016 and its implications for the future

Too much of something can be wonderful - Mae West

The United States of America has held its presidential election and the winner, against most hopes and expectations, was Donald Trump.

As the duly elected president of a great nation, Mr. Trump must be treated with the respect that a holder of this office merits. It therefore behooves us at least to attempt a reconnaissance through the smoke of the political battlefield and the exaggerated rhetoric, to see where the new president Trump and his putative team might be likely to act and how such actions will affect the rest of the world. The campaign slogan, 'Make America Great Again' has done the country a great disservice. America always has been great and presently risks being dragged down by political incompetence.

First of all, in all election campaigns there is a surfeit of hyperbole. Mr. Trump himself has traditionally had more interest in the chase and the capture (whether of women or in business) than in management. There is however a major difference between campaign platitudes and rhetoric and the reality of government. His interest is likely to be much lessened now that reality bites. There is for instance unlikely to be a wall separating the USA and Mexico. There is already a fence along the entire distance. It is equally unlikely that many or most Mexicans, legal or illegal will be sent back to Mexico; who would then harvest the fruit and vegetables in California and Florida? The landowners are mainly republicans anyway as George W. Bush discovered when he voiced similar attention grabbing ideas. There will also probably be no major renegotiation of the NAFTA and other trade agreements. It is possible there might be some tweaking to save face, but the threatened peremptory withdrawal from NAFTA would severely hurt U.S. companies with operations in Mexico such as Ford and Wal-Mart.

Trade with China was also a favorite target during the election campaign; remember however that U.S. companies such as Apple have very larges sales to Chinese consumers. Any sanctions would probably hurt the U.S. A. more than China, which has already begun to extend its interests globally away from the U.S.A. There is a suggestion that instead, the new U.S. Government will wish to impose sanctions on Chinese Steel, where overproduction resulting from the Chinese economy's switch from industrialized growth to consumer spending has caused the Chinese to dump low quality steel on the world markets.

The forthcoming President Trump will face more problems at home, but here again the exaggerated rhetoric and untruths will probably not be reflected in the watered-down reality. The promised return to employment in the US rustbelt is unlikely to occur in the form that the voters had hoped. There could well be support for more technological activities, though it is unlikely that the miners and metal bashers without training or modern skills will benefit. There are probably less expensive options for technological manufacturing outside the U.S.A than within it.

Mr. Trump will find himself continuing his war with the major American corporations whose chief executives have never seen him as coming from amongst their own ranks and although the hedge fund managers criticized him at every turn prior to the election, they are likely to kowtow in front of the Trump tower in the hope of currying favour. Mr. Trump has promised tax breaks to industry and substantial infrastructure spending. This should, on the face of things, greatly support U.S. Industry.

The BBC reports that there is a funereal mood amongst the 4,000 or so staff members in Washington. All are likely to lose their present jobs and must stand for re-selection. The corollary is that many of the skills accumulated by these staff members over decades could be lost and it will take some time to rebuild a functioning administrative system. The Trump promises of 'draining the swamp' in Washington could well lead to an ungoverned country.

Mr. Trump's oft reported lack of interest in detail (other perhaps than in his private jet) will mean he will have to delegate many decisions. At present the situation looks somewhat incoherent, but if a competent team is appointed this may change.

Foreign policy is, again despite the campaign rhetoric, likely to take a much less important role in the future administration. Many of the election promises, such as revising the defence agreements with Japan and South Korea simply cannot be met. They sounded good at the time. Israel hopes that the new government will support a stronger Jewish state. Political reality however will probably mean this dream will not be fulfilled and the Jewish voters within the United States will be disappointed. No matter, Mr. Trump has been elected and the next election is seemingly a long way away.

How does all this leave investors? U.S. industry, especially the many modern technological and pharmaceutical companies are very likely to prosper. They will probably not be allowed to be sold to Chinese investors, but their business will happily thrive none-the-less.

Interest rates were going to rise irrespective of the election results, the bond markets are likely to reflect a move toward higher inflation with higher yields and new issues will probably be less aggressively priced that in the past months.

Now is the time to look very carefully at U.S. equities, corporations will be able to thrive for the foreseeable future and there are some very good companies for disciplined analysts to consider.

A carefully constructed mixed portfolio of U.S. assets will have the potential for combining yield but without the downside volatility of pure Equities. Now that the uncertainty has passed, investors should, at the very least, consider diversifying their portfolios away from only European Equities and look seriously at the American equity markets, especially large and medium cap orientated funds to augment the diversity of their portfolios.

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.


John Townsend's investment opinions September 2016

Against stupidity the very gods themselves contend in vain - Friedrich Schiller, German Dramatist 1759 - 1805

There is a great deal happening in the global economic market, much is important but little has an immediate impact on the way that institutional traders think and act.

In China, the economy is moving from an infrastructure investment base to a consumer driven one. The economic growth rate is slowing and lending from mainstream and secondary banks is at very high levels. That economic growth is declining from incredibly high figures is not news. The data is widely held to be unbelievable with numbers dictated by the government. However, even with real growth of 3% instead of the official 6%, there are still many non-government sector domestic investment opportunities with good corporate governance. A good fund manager will find these and avoid the banks, many of which seem to be headed for disaster through their unskilled lending, having wrongly believed that the state would bail them out. China's imports are also changing, with consumer demand driving imports rather than engineering or raw materials. It is not that demand for steel, energy and engineered goods will cease, far rather demand for them is declining in favour of other imports.

Brexit, having caused two days of uncertainty in the investment markets then became less of an issue and calm promptly returned. The messages from the leaders of the weaker countries and the bureaucrats nominally at the helm of the European Union, that Britain should leave quickly and quietly - in other words, to fall on its own sword - have been ignored. Europe now has the opportunity to make changes within the Union, though bearing in mind the unlikelihood of reaching any decision; it is unlikely this will happen. At the recent meeting in Bratislava where the future of Europe was discussed, a number of suggestions were made. One glares out as an example of startlingly opportunistic but depressingly unrealistic thought. France suggests there should be a united European military headquarters, (presumably in France) controlling a European military force which would act in support of the European government. This is of course an interesting suggestion from the only European country capable of fielding a modern fighting force and one of only three remaining countries, after the United Kingdom's departure (the others being Greece and Poland), to have adhered to the 2% of GDP minimum spending on defence. The major problem with this idea is that any pan-European decision, including military action, will take so long to achieve that any war would be lost long before agreement was reached to fight one. Such a force becomes meaningless because its political leaders, each with their own policies, would never willingly agree on a coherent decision. So it is with the reform proposals put forward in outline terms in Bratislava. They are unlikely to be agreed by all the states at any time in the future and so are in practice meaningless.

There is still a marked imbalance between the economic strength of the European States. The Northern Sates led by Germany for whom the Euro as a currency is too weak and the Southern States led by France, whose internal domestic issues and ensuing economic weakness make their current value of the Euro against world currencies too strong. This cannot be muddled through over the long term and a two speed Europe with different currencies and different economic strategies has to be the outcome. If one wants swift action, rather than just a swift Brexit, there should be a clear and rapid North South split in the structure and policies of the economic union. A removal of the bureaucratic overlay could be an additional advantage.

Bureaucracy makes itself felt in Germany too. The former German health minister Andrea Fischer recognized that she had a problem with the four permanent secretaries of her ministry when she took over in 1998. She swiftly removed three of them, but in a recent speech, she reflected that the fourth one undermined her just as effectively as the other 3 would have. She left office in 2001. It is clear that the whims of an unelected bureaucracy, without reference to their elected Political masters, make the execution of German policy. This is true through the length and breadth of German society and it is then left to the German courts to decide what policy was intended and what the laws actually mean.

In the USA there is a presidential election looming. What makes this one special and interesting is that the choice is between two deeply unpopular candidates. The least disliked candidate will probably win. The suggestion is that there is so much hostility towards both candidates that many more undecided voters than normal will actually get out and vote.

Under the democratic candidate, there will probably be very few changes to current policies. The Republican candidate has promised far reaching changes, not all of which are honest, logical or feasible. It must be remembered that the US Bureaucracy as much as in Germany, can dampen or alter the reality of policies.

The US economy is gaining ground and US corporations are growing in their profitability. Now seems a very good time to switch from European equities into the US Markets. However until the result of the US election is known, there is much to be said for holding back for the time being.

Risk and its management is now all-important. Where the traditional fixed income markets are showing negative returns, there is a temptation to diversify into hitherto unknown areas such as the Emerging Markets and corporate debt with much lower risk ratings than most investors had previously experienced or understood. Indeed many companies are capable of issuing debt at effectively no cost and are steadfastly doing so. Investors in such bonds are not being rewarded for the risks they are taking. Yet there is a danger of believing that these conditions will last forever and therefore acting, or not acting, accordingly. They won't; the ancient dictum "These times will change" will inevitably make itself felt. Fund managers with analysts who are capable of assessing lower quality risk and taking coherent decisions will be able to avoid the inevitable future problems with debt from companies that fall by the wayside.

There is however now much to be said for investing in the Equities of the same high quality companies, where the yields, made up by equity market price increases and dividends, at least provide a passable return. Once again the skill of a management team and a wide distribution of risk will play key roles.

Looking into the future, there are industries that are once again flourishing after a longer term global economic downturn. Examples here are efficient oil and raw material producers. Increased consumer confidence also means an increased demand for the so-called next generation resources, such as lithium, battery storage production, renewable energy and coatings and packaging companies. These are detailed operations and need thorough competent analysis. They do however have a very strong future.

The major victims of the economic changes and zero or negative interest rates are the banks, which cannot make a profit with their lending when competition from other lenders is driving interest rates to effectively zero. Many funds from the major fund management companies had and still have a cushion of bank equities. These are now suffering badly and the entire sector is in urgent need of a substantial review. There is already a rescue scheme being organized for at least one Italian bank, even if this goes against European regulations. In Italy, regulations which would normally be adhered to rigidly in the Northern States are adjusted - almost with impunity- to meet specific political and economic needs.

Japanese and Western central banks have kept their interest rates - the rate at which the Central bank lends to commercial banks, at zero for a considerable length of time. The policy began in Japan in 1992 and was then taken up by the US Federal Reserve in 2008 to stave off economic collapse. In Europe, the ECB followed suit in March 2016. A zero interest Rate Policy was originally intended as an emergency measure to provide liquidity to the banks. As happens so often with emergency measures, they are clasped very tightly even when the need for them has disappeared. At the same time, the Fed, the ECB, Switzerland, Sweden and the Bank of England have Quantitative Easing Programs by which they buy high quality debt from the commercial banks to inject more money into their respective economies. Such cash injections were intended to increase investment demand and lift inflation rates from near to zero at present to a more normal two percent. This has not happened and has left the central banks with inflated balance sheets and often questionable assets, but without ammunition, other than the fear of uncertainty amongst investors, to steer their economies. The emergency measures have continued and will continue unabated until someone, somewhere, comes up with a better idea.

The outcome is that fixed income investments, needed by so many institutions to secure their obligations in the future, now have a zero and sometimes negative yield. Insurance companies have to incur costs to manage and meet their obligations and cannot now do so with the present low and indeed negative yields in their investments, The result is that investors, both institutional and retail have to increase the risk of their investments in order to achieve a higher yield. The concern once again is that many investors really do not understand what it means to take higher risks. Their nervous reactions to bad market news means that suddenly bonds and to a lesser extent equities will be dumped wholescale into the markets, almost at any price when the computers, who are not programmed to understand risk, signal a sell order.

Where does this leave the private investor? The safe investment havens of the past have disappeared. Not only will some life insurance companies no longer be able to meet their guaranteed payments and may be threatened with having to avoid making payments under their policies with guaranteed interest rates, but the wholesale stampede into previously unknown investment markets, such as the Emerging Markets in an attempt to improve returns, has dropped many bond prices in this sector. Some well managed funds, such as those from Nordea have seen a massive influx of institutional and other fund of fund money and have had to close their doors to further new investment. The fact that this is hot money and can just as quickly disappear as happened with the property funds in Germany in 2011, should be clear.

There is no realistic alternative to investing in Equities, either through equity funds or as part of mixed strategy strategies. The aim has to be to build up a carefully diversified portfolio of well-managed funds and be prepared for the many changes that will inevitably happen in the near and medium future.

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.


Brexit - Reaction to an unexpected referendum result in the United Kingdom 24 June 2016

The xenophobia of the elderly members of the British populace has won through. There were simply not enough educated younger voters to stem the tide of ignorance.

The United Kingdom voted narrowly to leave the European Union, citing a dislike of Brussels Bureaucrats in general and Jean-Claude Juncker in particular, European inefficiency with a marked inability to take any decisions, Southern European corruption and immigration (though not from North Africa, far rather from Eastern Europe). The results of the British referendum were inconclusive, but in the United Kingdom, with a first past the post voting system, even a small margin is enough to establish a result. The buffoons leading the 'leave' campaign have clearly started to wonder what the next step should be, as they had no plans beyond the referendum and my not even have expected to win; in the meantime they seem to have gone into hiding. There are calls to find an Exit from Brexit.

The investment and currency markets immediately and expectedly reacted to the result with a series of violent knee-jerk movements with the value of the pound falling sharply against the Euro and the Euro itself falling against the US Dollar and the Yen. Stock markets fell sharply and the institutional flight to quality caused major purchases of US Dollar and Japanese government Bonds.

It is however unlikely that trade between the United Kingdom and the rest of Europe will be affected at all in the short-term and probably not even in the medium term. London's position as a global financial hub may be reduced, though principally probably in favour of Dublin where the financial staff at least doesn't have to learn another language. The hopes that Paris and Frankfurt may be nursing are likely to be dashed. European governments are calling for a swift Brexit, maybe forgetting all the while that if that were to occur, it would be the first time in modern European history that any action was taken swiftly.

Where does this leave the private investor?

Nothing much will change for at least two years. While the investment markets are shaking with the fear of uncertainty at present, looked at dispassionately, good European fund managers will still find many excellent companies in which to invest, both in mainland Europe and in the United Kingdom. The sector that will suffer most are the banks, but few fund managers have investments in bank equities and bank debt can only gain in yield.

There is, strangely enough, a big world outside Europe and the United Kingdom.

The US markets will now play a bigger role in investor portfolios, both with US equity and debt funds. Good fund managers will find many opportunities with excellent companies to make a profit. The skill will be to find those good, indeed excellent, fund managers.

The energy markets are now once again in vogue, with a new discipline among producing companies. In the same vein, Emerging Markets, having had their own political problems had become less attractive, but are now selectively looking profitable again. Some markets, such as Russia, remain uninteresting and high risk, but China is as always worth considering. Despite the current flight into Yen, investors should be aware. The problems caused by Prime Minister Abe's three arrows policy, where the third arrow missed its mark, remain and dent corporate profitability.

Now is the time to invest, while the markets are jittery and prices wonderfully depressed.

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.