The TCFP investment committee met on 19 September to discuss the current economic, political and investment environment.
As a result of our meeting the TCFP Model Portfolio will be changed as described below.
Here are brief notes of our discussion:
Politics
Not much has changed since we met in June. It is clear to all that Rishi Sunak is in the last year of his Prime Ministership. His replacement offers nothing new, so we expect more of the same.
The new Labour Government will be some shade of competent, certainly not dangerous, but equally unwilling to make the changes the UK desperately needs.
We need shock and awe; we will get slap and tickle.
In Europe, France and Germany are lurching right, as is much of the rest of the EU. This is alarming to the centrists who, rather than try to govern better and address the legitimate concerns of millions, prefer to think of ways in which the right can be banned.
In the US Joe Biden could be in his last year. But it is a coin toss. We think Donald Trump will be the new president if he can stay out of prison. It will not be a “clean” win whoever does win.
The Ukraine war will drag on. We expect a dramatic collapse of one sort or another (probably in Ukraine’s favour) that tips the balance irreversibly. Perhaps Ukraine cutting off Crimea.
Interest Rates
UK interest rates are very near their peak. EU rates possible are at their peak, US rates are probably paused with the Fed wanting the markets to believe there will be another rise.
Interest rates are a blunt weapon. Some argue that they have already had quite an effect, others that not much has changed.
History tells us that central banks invariably raise rates too high resulting in a recession. With most who want to work working recession is being kept at bay. But that can change.
Over the next 18 months interest rates will stay broadly where they are if there is not a recession. If there is a recession, they will come down steadily towards 2-2.5%.
Your guess is as good as ours when it comes to what will happen. But the portfolio change below errs on the side of caution. If there is a recession, we want to be in less volatile equities.
Inflation
UK inflation will leg down in October (but be reported in November) as that is when reduced energy prices come into the figures. Energy prices this October are much less than last October. Expect a November inflation rate starting with a 5.
After that the markets expect inflation to drift lower to around 2% at the start of 2025, assuming no recession.
You can expect a similar pattern in the US and EU, all things being equal. Which they rarely are.
GDP
The purpose of raising interest rates is to slow the economy. The central banks want a recession to tame inflation.
The expected recessions in the UK and US are proving stubborn to materialise. The US could well be past having a recession at all (the markets think so, we are not so sure), and it is certainly the US economy that matters most.
In the UK the tight labour market is fuelling wage increases, which fuel inflation. Prices of goods are falling and dragging down the overall inflation figure, but slowly.
Productivity issues are serious in the UK. THIS ARTICLE (or CLICK HERE) suggests that there is a massive disconnect between available jobs and the skills to fill the jobs and/or making work pay.
For example, in Liverpool about 19% of the working age population receives out of work benefits on top of which there are a significant number choosing not to work but not claiming benefits (early retirees and the like). Yet Liverpool has 9,000 job vacancies with an average wage of £34,000 pa. Productive, well-paid jobs are not being filled.
If something approaching 25% of your working age population is not working (for whatever reason) the struggle to raise living standards is a very hard one.
It is a massive headwind and one of the reasons why, in the not-too-distant future GDP per head in the UK will be less than GDP per head in Poland. In this very important measure of national wealth Britain will be poorer than Poland. That was unthinkable 30 years ago.
And back to recessions…the ECB, of course, has managed to create a recession on the continent bucking the trend in the UK and the US.
TCFP Model Portfolios
We agreed to reduce Emerging Markets from 20% to 10%. And to increase Large Companies from 30% to 40%.
This is a slightly defensive move. If there is a recession, we expect large companies to do less badly than emerging markets companies.
This change will happen this week.
We also considered increasing the bond allocation from 20% to 25% for the same reasons. But we decided to hold off for now, expecting bonds to be a more attractive proposition when we meet in December.
And that concluded September’s meeting. The next meeting will be in December, or sooner if needs be.