The TCFP investment committee met on 6 December to discuss the current economic, political and investment environment.
As a result the TCFP Model Portfolio remains unchanged.
Here are brief notes of our discussion:
Politics
The budget showed that the Tories have all but given up. Radical change is needed, none is forthcoming. Worse still, Labour appear willing to stick to Tory spending plans and how they are funded.
For us it is 50:50 that Trump gets in. Being incarcerated is probably a bigger threat to his chances than Biden. If he wins the election but is found guilty, can he pardon himself?
Do not be surprised if Biden announces “health concerns” or similar and steps aside. Do be surprised if the Democrats do what they should and euthanase him.
In the EU things appear to be jumping to the right. However, there is a big difference between headline grabbing election victories and the actual governments that then govern. The difference between rhetoric (to get votes) and action is usually very stark.
In 2024 some 2 billion humans will elect new governments, that is a world record. In many countries the electorate seem primed to vote for change. In the UK we will get no such choice.
Interest Rates
Things have changed greatly. A matter of weeks ago the markets saw 0 change of a March cut. Now it is 50:50.
In fact markets are backing a 1.25% drop over the course of 2024. I am referring to the US rate of course, nowhere else matters as much.
The turnaround and is mainly due to better inflation figures a month ago. As inflation falls so should interest rates otherwise it means monetary policy has tightened.
It is always real / after inflation interest rates that matter. If interest rates move from being 1% above inflation to 2% above inflation (because inflation falls) monetary policy has tightened.
The assumption is that central banks don’t intend to tighten monetary policy further for now, they are happy with its tightness and so interest rate cuts can be expected. But beware flies in the ointment, namely inflation stickiness and employment.
Inflation
We appear to be well beyond the peak of inflation. The question now becomes how sticky it will prove to be in reaching the general 2% target.
In the UK wage demands might keep it higher for longer. Elsewhere some sort of inflation shock might come along, or employment figure might under or overwhelm.
If that proves to be the case, interest rate expectations will change and that should affect both bond and equity prices.
GDP
The outlook in the US is robust but slowing. There are no signs of distress, but plenty of indicators still suggest a recession is in the post.
Perhaps the mythical soft-landing will be achieved, a shallow short-lived recession counts as a soft-landing.
A year ago the central banks were hell bent on causing an inflation slaying recession. They vigorously applied various blunt instruments, yet the patient refused to die and inflation has moved on – it was transitory after all!
TCFP Model Portfolios
We convened an interim / mini ICM just 6 weeks ago as high yield corporate bonds and government bond yields were edging towards “really quite attractive”. We expected to act on that in this ICM if matters moved just a little bit more towards us.
In fact, the complete opposite happened thanks to the recent inflation figures.
And so the model portfolio remains unchanged.
And that concluded December’s meeting. The next meeting will be in March, or sooner if needs be.