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John Townsend’s Investment Opinions January 2020

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There is only one good, knowledge and one evil, ignorance. – Socrates

A very Happy New Year and a Happy New Decade to all.

There have been many changes in the past decade. Everyone has their own list of events, some good, and some bad. The one certainty is that the next 10 years will have many more changes and there is no certainty as to what these changes will be.

The investment markets are influenced on their returns by the acts of politicians. Some acts are obvious, such as those in the US at present, some are less clear, as in Germany, but will probably have a long lasting effect.

Cleon was an Athenian General who died in 422 BC. In his lifetime he earned a reputation amongst his peers for being a loudmouthed, unscrupulous and war-mongering demagogue. He accused his peers, especially Pericles of maladministration of public money, though the latter was able to clear his name. Cleon went on to dominate Athenian Politics, misusing the democracy that was applied there. He was rough and unpolished, but he knew how raise the emotions of the poor Athenians who in turn supported him in making false charges against his political opponents so as to remove them from power. He criticised the Athenian generals, but was himself a failure when it finally came to leading an Athenian army. The actions of Cleon led inevitably to the downfall of the Athenian Golden Age.

Although an aristocrat, he found it politic to break off all connections with his own noble background. His influence lay in a forceful and bullying style of politics and a tone which was both anti-intellectual and anti-aristocratic. In his treatise ‘History of the Peloponnesian war’ Thucydides described Cleon as being an opponent of peace because if tranquillity were ever to be restored, his crimes would be more open to detection and his slanders less credited.  Lessons can be learnt from history, even from 2,500 year ago.

Careful investing means having to look beyond the immediate and past movements in the markets. Whereas major US corporations and their shares have contributed too much of the profits in the past years, some could now be running out of steam.  Many companies in the US and in Europe have borrowed heavily while interest rates were (and are) low, in part to buy back their own shares, which in turn has helped to raise equity prices. This increased debt has also been used to cover inefficiencies. The problem is that much of this additional debt will come back to haunt the lenders when interest rates begin to rise again as one day they will and when companies fail as a result. A major change in the past decade has been that it is no longer the banks that lend to companies and foreign governments, it is the investment funds. When the crunch comes, the banks will have earned their fees as arrangers, but the funds will have carried the risk and will bear the brunt of any down turn. It is time to limit investment in fixed income products severely.

Investors have to be able to understand the risks their funds are taking. ETFs are the archetypal ‘fake’ investments. An ETF does not carry out an analysis, but instead follows a market blindly; when an index changes its composition, so will an ETF.  The difference between the selling price of the old asset and the purchasing price of the new one is then disguised in the undisclosed costs. In a strong and rising market, a lack of decision making analysis does not show. When an economy weakens, critical analysis becomes essential to understand the risks and avoid or at least mitigate them. An ETF invests using borrowed money attracted by the seeming lack of costs. Analysis and risk management costs money. Analysts mitigate losses; without such knowledge there is no understanding and therefore no protection against sudden market movements.

Investment sectors in the coming decade must include equity funds which earn dividends from the companies in which they invest. These companies have to pay dividends from earnings and not from increasing their debt. Only careful analysis will identify these.

There is an increasing market for sustainable investments. This market will continue to grow rapidly and the prices of shares from companies whose activities are clearly sustainable have risen and will continue to rise based on the demand for such assets. The bandwagon effect has of course taken hold and many fund management companies have labelled their funds as being sustainable, even when their assets are not. This is called ‘greenwashing’. There are inevitably many agencies which offer sustainability ratings. Some of these are credible, others, again, are not. The United Nations has issued a list of 17 Sustainable development goals which investors should adhere to when selecting their investments. Many of these goals are contradictory and professional fund managers have had to sub-divide these criteria into five broader groups to make conscientious investing possible.

Economic markets too have their problems. Investors have benefited greatly from the rise in demand for US and European equities, but the US economy seems to have reached a plateau which Europe has yet to arrive at. The warning signs are there and caution is called for. Third-world investments especially in Asia, including China, presently show a great deal of promise.

Japanese companies have quietly become profitable again. Japanese institutions are investing domestically and abroad and the stock markets, which have been at a low level for too long a time, have begun to rise, especially as alternatives to the US markets are being sought. The usual divisions between value and growth stocks are not particularly relevant here. Good companies are being supported by rising demand. Fund investors should concentrate on finding competent and experienced fund managers to access this market.

Chinese companies have been vilified because of the involvement of the Chinese state in many aspects of their activities. In truth, those companies which are big enough to warrant overseas investment do probably have governmental oversight, but many are inherently dynamic and profitable. There is an argument that larger companies even with state oversight, still have a spirit of entrepreneurship, yet are unlikely to suffer the economic volatility in times of adversity, particularly because of government support. The banks are another matter however. The Chinese government, having clamped down on excess lending from secondary banks, especially for investments outside China, is now encouraging local banks to support small and medium companies which could be suffering from concerns over the trade dispute with the USA.

There is presently an attempt at cooling the so-called trade war started by President Trump when playing to his red-neck US crowd. He might have had more success had he reined together the other global economic players, but teamwork has seemingly never been his strength. In the end, it is US farmers and industry that have suffered more than any Chinese sector. Many US companies are now terrified that the markets for their products (the biggest market for Apples iPhones is in China) will dry up. There will be a treaty of sorts and Mr Trump will claim the usual resounding victory in this, an election year. In reality the US has missed its target and has gained only scorn and increasing distrust from China as well as from traditional US allies and much of the rest of the industrialised world.

The investment markets will not continue their steep upward path in 2020 and beyond. There will be increasing volatility and investment portfolios will need to be adjusted to meet these challenges. This means that the proportion of equities in even the most dynamic portfolios will need to be reduced. Above all, portfolios will need to be diversified within investment sectors and between them. There can be no alternative to broad diversification. The hype over low cost ETFs should be ignored in favour of safer returns from the best performing managers with real analysis, high returns over their indices (Alpha) and a proven track record.

Past performance is no guarantee of future profitability.

John Townsend’s Investment Opinions July 2019

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Truth is always strange, stranger than fiction. – Lord Byron

Tainted politics is taking an undue place in the financial Markets: President Trump’s one man and teamless US government (with the support of a very few loyal , ambitious, but not especially capable henchmen) and Boris Johnson’s directionless  accession to the prime minister’s position in the United Kingdom both carry the hallmarks of an incoherent, disruptive and anarchistic style. To this end both countries are at risk of descending into economic and political chaos with no clear direction and no ability to protect themselves in the event of a coherent threat, whether economic or political. Mr Johnson, who once failed at a career in Journalism largely for manufacturing stories, has been unflatteringly described by his past editors. He has, by all accounts, all the moral direction of a windsock.

The US President, a self-described dealmaker, is imposing tariffs on his own international allies with Europe and Japan in particular bearing the brunt of his newly imposed penalties. There is no logic to these tariffs, other than an attempt by Mr Trump to flex his muscles in the run up to the next US presidential election. The biggest danger of his actions is that the opposing countries could feel themselves forced to devalue their currencies. In any event, it seems that the United States is also planning to devalue the US Dollar to make US exports more competitive. This devaluation competition would be destructive to all western trade.

The threatened trade war with China started by the US president (because trade wars are apparently easy to win) seems to have had little effect on China. Here the annual growth rate has slipped from 6.5% to 6.2%, though this is probably as much due to internal changes made to their economic policy by the Chinese government than any effect the US tariffs are inflicting. The 6.2 % level is still within the limits set by the Chinese government of between 6.0% and 6.5 %. Here it should be noted that the US president seems to have misunderstood the cash flow from imposing tariffs, which is an additional cost to the US consumer not to the Chinese suppliers.

The US economy is buoyant at present and interest rates seem to be set for a decrease of 0.25% again after a similar sized increase in September of 2018. There are however economic clouds on the horizon which could cause weakness in the US economy.  With money being so inexpensive to borrow, there are many US companies expanding through investment, but equally there are also many which are keeping themselves afloat with heavy borrowing. This is potentially troubling for the high yield (and therefore higher risk) investment funds which seek extra performance by investing in non-investment grade companies. They will suffer badly when interest rates begin to rise once more and the US economy weakens. I have chosen to avoid these funds in my client portfolios.

Inflation rates both in the US and in the Eurozone are at very low levels, (1.8% and 1.3% respectively). Growth is equally low at around 1% per year. It is hard to see, given how much money is being made available at present, that inflation will rise appreciably or at all. Interest rates in Europe have also been structured to stay low, even after Mr Draghi leaves his role as the head of the European Central Bank.  Mrs Lagarde will have little freedom to raise Euro interest rates when she takes over. The EU does however now have two problem members, Italy and Poland, which could affect political stability. Both have vocal anti EU Political voices. Low interest rates will undoubtedly help Italy to stay afloat, without that country having to make any difficult internal economic adjustments. Poland, which is the EU’s biggest net recipient of cash, does not pay interest on their EU support and so will be less affected by any future rise in interest rates. In truth neither can afford to leave the shielding wings of Europe, but they can and do stir up unnecessary controversy with their demands which appeal to their local constituents.

The US president’s irrational decision to unilaterally cancel the Joint Comprehensive Plan of Action (JCPOA), a multilateral agreement to limit the production of Iranian nuclear material, was in truth intended as a cancellation of yet another measure signed by President Obama, who Trump loathes. Quite why former president Obama is disliked so intensely by Mr Trump is not clear, but the measures the former put in place have been cancelled wholescale without replacement.

Iran has an intractable problem in that it has different internal factions who compete for power and often do not talk to each other. There is the officially recognised government, with whom the foreign governments interact, but there is also the Iranian Revolutionary Guard Corps, with whom foreigners do not communicate, which is the spine of the current political structure and is a major player in the Iranian economy. The IRGC has taken its own violent steps against oil tankers in the Arabian Gulf and the kidnapping of a British vessel in international waters in revenge for the seizing of an Iranian vessel full of oil destined for Syria. The revolutionary guards are not under government control and western foreign ministers’ speaking sternly to their Iranian counterparties has very little effect. The other parties are mainly religious while having an effect the Iranian people, are not important in the international field. It would have been much wiser to have left the treaty untouched.

Saudi Arabia and its allies in the Gulf are the implacable enemies of the Iranians. This has much to do with the Sunni (Saudi et al) versus Shia (Iran and Northern Arab states) conflict within Islam. The Saudis have garnered the support of US president Trump and his son-in-law and feel themselves strong enough to take military and economic measures without regard to other international opinion. This has many of the hallmarks of the League of Nations between the two world wars.

There is however good news from the Emerging markets sector, especially in the Asian region, where good fund managers with capable analysts are now achieving good sustainable returns. In an ever more complex investment market, it is essential to use only those fund managers who have adequate corporate analysis teams  and can take decisions based on  ‘bottom up’ as well as ‘top down’ criteria. There are many excellent companies to be invested in. The big US and European companies are covered by several teams of analysts and cannot make a move without causing a reaction. Smaller, non-US and European, Companies have far fewer analysts watching them and therefore allow more room for valuable research results.

The Japanese economy is proceeding quietly along its own path. Western economic powers are lamenting the increased ‘Japanisation’ of their economies. The Japanese central bank however has been supporting its domestic economy with low interest rates and adequate financial liquidity for many years. This has included buying Japanese government debt and the equities of many big Japanese companies. The second biggest holder of Japanese government debt is the ubiquitous housewife Mrs. Watanabe, it is unlikely that these investors will ever wish to offload their investments and Japanese paper will therefore, despite being relatively unexciting, produce a steady return. While these measures have not led to a high growth rate, they have encouraged corporate profitability and Japanese companies are now healthy.

The Chinese growth rate has reduced slightly to 6.2%. But the Chinese government is working to change the direction of the economy, reduce domestic debt and he domestic dependence on loans from the unregulated banking sector. US tariffs are having only a limited effect, with most goods, such as agricultural commodities which the Chinese used to buy from the US and are now the subject of revenge tariffs, being bought from other countries. Foreign car companies however, especially those with factories in China and those selling cheaper models, are suffering badly with demand for their vehicles drying up. I suspect this is likely to be temporary as the economy gets used to the new government borrowing policies. Again the emphasis on investing in Chinese company risk is to have very highly trained and experienced analysts.

There are still major discussions relating to the difference between passive investments such as ETFs which actively follow a real or artificial index and Active investments such as managed funds. Passive funds theoretically have lower costs as they have no front end fees and no management fees, they do however have the costs of switching their investments when the indices change, though these costs are rarely if ever publicised. Actively managed funds, especially when carefully analysed and well managed, have the advantage of earning a positive margin over an index, known as Alpha. They are normally compared on a net basis after all fees and charges. A client orientated portfolio of actively managed funds is therefore likely to perform better than a portfolio of supermarket index funds. I am a firm believer in seeking out medium term ‘Alpha’ and combining uncorrelated strategies into portfolios with above average returns.

The key to successful and profitable investing in the fund markets is to plan ahead, to stay calm in financial storms and to use the best quality managers who deliver consistent Alpha and as far as possible do not all invest in the same stocks and strategies, thereby avoiding ‘bunching’ of risk.

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)

Investment Opinions December 2017

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Those are my principles, and if you don’t like them… well, I have others.  Groucho Marx

President Trump has finally passed the first important measure so far of his presidency, the tax reform bill. Inevitably in his world of superlatives this is the biggest and best tax cut ever. In reality it isn’t, there have been other larger ones, but it no longer makes a difference. This particular tax cut, being undertaken with borrowed money is dangerous and shows absolutely no understanding of economic reality by a president or by the sycophants surrounding him.  The new measure is said to be a Christmas present for all Americans; perhaps more appropriately there should be an addendum in parentheses, Americans like Mr. Trump. Sadly most middle income Americans have no idea whether or not they will be better off in 2018, as the cuts to their tax deductions are desperately unclear. Mr. Trump’s other achievements to date have been to roll back anything with the name of Obama on it, whether or not it was beneficial to the citizens of the United States. We must constantly remind ourselves that he is the legally elected president of the country and until this changes, this is the price that must be paid for democracy. American influence on the global economic and diplomatic stage has declined sharply.

For investors, 2017 has been a profitable year, though with little rationality and very high volatility. The low, indeed near zero, interest rates in the United States of America and Europe have encouraged corporations to borrow to finance their operations and any kind of return on their investments. Such demand is leading to the acceptance by investors of much lower quality than in the past, which is leading to a series of irrational bubbles, particularly with junk or high yield bonds. Perhaps the most obvious bubble investment is Bitcoin, which has risen in price from US$ 1,000 in January to around US$ 19,000 in November and now US$11,000 today. This massive increase in the price of a Bitcoin is odd as it is a completely unregulated market with nothing behind it and no governing body to oversee abuse. One has to think of the London South Sea Bubble or the Amsterdam Tulip and bulb craze. The original concept of Bitcoin was as an alternative currency, but this has been lost in the panic. The main Bitcoin producers (known as miners) are in Russia and the Ukraine. Bitcoin mining is an expensive and highly technical system and despite many best efforts, uncontrolled. There is now a new futures market for Bitcoins in the US, which in the past has normally been a prelude for a disaster in the market. Investors may congratulate themselves now on the high price of their units, but when the market declines they will find no buyers for their Bitcoins and their investment will swiftly become valueless. Those whose memories are long enough will recall the dotcom era. The only advice is to stay away unless one really wants to gamble on markets more risky than even the Chinese horse races.

Other strange sectors are ETFs. I have written about these before. The market for exchange traded funds began to allow corporate investors to increase or sell equity investments quickly when they wanted to. Since then the market has exploded and even retail investors have been dragged into products which they don’t and cannot understand and where they have vaguely heard there are few costs. In fact ETFs lag behind the markets they are supposed to follow and because their investments are effectively blind, they have neither corporate analysis or governance to rely on, nor the distribution of risk by an experienced manager. This market, while not as bad as Bitcoin, is still a recipe for disaster for the private investor without adequate advice.

We can see the bubble investments in the technology sector. Companies such as Tesla may make very interesting products, but at a cost much higher than the price they can sell their cars for. They have just announced another record loss and admitted that production is way behind schedule. This is still a good company compared with some being enthusiastically supported by the market place. There are indeed good and profitable technology companies in the FANG (Facebook, Amazon, Netflix and Google) sector, but there is also an awful lot of dross which promises to go sour when the excitement dies down.

Global interest rates have fallen as low as they are likely to. The end of Quantitative Easing is being seen in the United States and in Europe.  US interest rates have begun to rise slightly and Quantitative Easing is being cut back slowly, but American corporate profitability and efficiency is such that equity prices should not be affected. In Europe however, the head of the European Central Bank Mr. Draghi has a problem. He knows that the QE program needs to be cut back to reduce the Central Bank’s balance sheet and that interest rates have to begin to rise. However, as a good Italian, Mr. Draghi also knows that the inefficient Italian economy and banks coupled with the massive Italian national debt, cannot afford higher interest rates. So these have to be held back as much as possible. However, there is very little chance of Italy becoming more efficient or disciplined and repaying its debts, so the next crisis is destined to come in the near future.

The rise in the equity markets is largely based on the fact that most of these different markets declined sharply 10 years ago. Most of the efficient companies remained profitable and the present artificially low interest rates leave investors desperate for positive returns.

The American equity markets are presently strong, having undertaken the necessary measures to improve their efficiency. The Trump tax easing measures have helped, of course, but these were largely discounted.  The US technology sector is flourishing and housebuilding has renewed confidence relying on wage growth in all sectors from the lower to the higher incomes. Coupled with that, American equities have always traded at a premium to equities elsewhere in the world; their present levels should not be seen as being excessive especially as many US pension funds and institutions only invest in their domestic markets.

Europe is also booming, especially Northern Europe. Here the Goldilocks environment where everything is felt to be ‘just right’ exists at present and many companies are showing profitability and growth. The economies of France and Spain are also showing signs of strength, though South Eastern Europe is still heavily dependent on the largesse coming from its more northern neighbours.  As long as investors rely on fund managers who have the ability to select profitable companies from the Northern European states, Europe is still a sound investment.

A decade of stimulus has helped the Asian markets to finally regain enthusiasm but has also stoked speculative fervour. Japan has now begun to find new confidence in both the blue chip and the small company sectors, with foreign investors having been reluctant to step in. This has now changed, especially as just these foreign investors need to find a profit from the money under their control. The Japanese market is showing a great deal of promise.  India too is gaining ground as a source of profitable investment. Of the original BRIC countries (Brazil, Russia, India and China) India and China are showing most promise, though perhaps India more so than China at present. The other two, riddled as they are with corruption and failing corporate governance are well worth avoiding.

Some property markets are still more or less booming, Australian house prices have been fuelled by very low interest rates, with Sydney’s house prices having risen almost 70 percent and Melbourne’s 57 percent over the past five years. This has all the hallmarks of a bubble which will burst at the latest when interest rates begin to rise and demand from Chinese investors falls away. Much the same is true of property markets in Hong Kong with residential prices having risen over 180 percent since 2008. The Chinese central bank is clamping down on excessive lending by secondary tier banks and the ability of normal Chinese investors to compete in the monopoly world of Hong Kong is being severely reduced, something that will only be exacerbated as US Dollar interest rates rise again.

The almost desperate struggle to find a return on investments has meant that many banks, institutions and funds have begun to lower their risk thresholds and invest in debt from companies and countries they would otherwise never have considered. Ample liquidity has to be used, is the feeling not only by the traditional markets but also by the Chinese financial sector. Prudential lending and probably prudential reserve positions are being ignored, and once again investors need to observe fund managers carefully to see which are following careful strategies and which are merely seeking yield at the expense of quality. It is worth mentioning that the growth in high yield bonds, known in the 1980s as junk bonds is likely to be one of the first victims of a new realism.

The market for multi-asset investments has begun to prove itself, especially when equity volatility and thereby perceived risk has grown. Rising inflation and interest rates, albeit only slowly increasing, make it necessary for investors to seek new sources of diversifications. Funds that invest in Equities but also fixed and floating rate debt, commodities and currencies all have their place in this category, as long as the fund managers have shown their track record of being able to handle such strategies. Some, especially the black-box trend following programs have sadly completely failed; which is precisely why careful analysis and due diligence in reviewing fund managers is so essential.

In 2018 we will see tax changes in Germany, which have a small impact on private investors but which, together with the new MIFID II regulations will increase the amount and clarity of information that has to be supplied by intermediaries and Fund managers. This is nothing to be alarmed about and will hopefully ease the dangers of the miss-selling of inappropriate investments. The days of miss-selling to the ‘A&D’ (alt und doof) clients by the German banks in particular will be thankfully numbered.

There is still strong life in the global equity markets, as long as investments are carried out carefully and with due care and analysis. These markets will become increasingly volatile as institutions become nervous. One cannot discount a sudden nuclear or intense war between, for instance the USA and North Korea which would stir financial disharmony among the inexperienced ‘16 year old institutional traders’ who have no experience, but crises in Bitcoin, Block chain and the Technology stocks are unlikely to prove a ‘Black Swan’ moment and trigger total panic as in 2007/8. It pays to be wary and careful.

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)

John Townsend’s Investment Opinions June 2017

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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 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.