The TCFP investment committee met on 26 June to discuss the current economic, political and investment environment.
In April we had anticipated that the upcoming raft of economic and other data would prompt us to change the portfolio allocations.
That did not come to pass and so the TCFP Model Portfolio will remain unchanged.
Here are brief notes of our discussion:
Politics
If a week is a long time in politics two months is an aeon. Since the last ICM Rishi Sunak has transformed from a PM with an uphill task to a dead man walking. The markets have, in effect, decided that he is no better than Liz Truss. Our next PM will either be Keir or Boris – choose your poison wisely.
Over the pond we expect Trump to be the Republican nomination (unless he is incarcerated) and for Biden to win. If Trump is locked up, then De Santis will win the nomination and give Biden a run for his money before losing to him. No-one really wants Biden again, but they want the other options less.
In Europe Putin is not a dead man walking, but he is rattled. His focus is how to survive the war, not how to win it.
Interest Rates
Interest rates will be higher for longer in the UK. Bad news for much of the economy and population.
In the US they are “paused”, let’s see for how long, it’s clearly rosier over there than here.
Central Banks everywhere will look back and realise they have over corrected. That’s no surprise, it happens every time. Interest rates are such a blunt tool – you never know by how much or when a rate rise will make any difference.
Inflation
Inflation in the US is on the way down.
It is not falling in the UK because services (as opposed to goods) inflation is high.
Much of services inflation is made up of wage inflation. Services inflation is always higher than goods inflation and is running at about 7% pa, the balance of the current rate of inflation is from goods inflation.
Goods inflation is coming down but not quick enough to neutralise services inflation, and services inflation shows no sign of abating – employment is very high.
The solution to high wage demands is a recession.
GDP
The UK should be in recession but somehow isn’t. We are teetering and have every expectation that there will be (a probably “welcome”) one.
The Eurozone is in recession, which is no surprise.
The US is not in recession but hardly shooting the lights out.
***Tech Speak Warning***
The yield curve has never been this inverted, for this long and there not been a recession. These are unchartered waters.
Expected investment returns
It is as we were….
Short-term returns to continue sideways. If they break out in any direction, we think down is more likely than up at the moment.
Longer term neither equity nor high yield bond valuations are exciting.
This is as good a reason as any for us to expect the next breakout to downwards – it will go someway to restoring more compelling valuations.
Unchartered waters are neither the time nor place to deviate from doing what we know best. Now is the time to have more faith than ever in the great companies around the world. It is they that make things, employ people, invent and innovate. They are the root of all wealth. They are who we need to be owners of. And we are.
In contrast cash is needed in the short term (under three years) but to be avoided at all costs in the long-term. It is a guaranteed long-term loser.
You own government bonds as a necessary evil. It helps us keep our cool and can prove to be an exceptional ally when the great companies of the world are temporarily undervalued (aka a stock market crash).
When that happens they allow us to buy cheap and reap outsized rewards. We remain alert to that opportunity which should avail itself every 2-3 years.
TCFP Model Portfolio
Still no changes, although we remain on alert.
And that concluded June’s meeting. The next meeting will be in September, or sooner if needs be.