David Roberts

730 billion reasons to be cheerful

David Roberts

As regular readers of our team’s fund commentaries and blogs will know, we are reluctant to expose client capital to extremely expensive bond market ‘beta’ at the moment, preferring instead to play directional themes.

 

I’m often challenged in this assessment by those reminding me that central banks are “really worried” and “moving to ease monetary policy”, offering support for longer duration strategies. Last night’s move from the US Federal Reserve to enact a “mid-cycle adjustment to policy”, cutting rates by 25 basis points to a range of 2.0%-2.25%, may further entrench this view.

 

The Fed’s decision has received a mixed reception, disappointing some commentators who had called for a clearer signal of further rates cuts to follow this year. But the fundamentally pessimistic view from the Fed, that this rate cut insurance is required to protect against economic uncertainties and downside risks, seems to be at odds with the inflation and growth data that I’m seeing. Given that we are 11 years into an expansion, the data look pretty good to me.

 

Although manufacturing and investment are rock bottom, so far the global economy has plodded along just fine. The IMF may have recently downgraded its economic forecast, but it has hardly taken a scythe to its projections. Global growth for 2019 is now expected to be 3.2% rather than 3.3%, and the 2020 figure has edged down to 3.5%-3.6%. This is not really a shocker.

 

Why has the economy remained so resilient? Well, a few “did you knows” may give us some clues:

  • US wages are now worth US$9.3trn per annum.
  • They grew at an annualised 3.7% in the first half of 2019.
  • This was the fastest pace in a decade.
  • Put an “extra” US$350billion into consumer pockets.

 

A happy consumer with a bit of money in his or her pocket normally leads to a bit of growth. And while US$9.3trillion is a lot of money, it is only around half of US Personal Income (wages plus rental income plus investment income, etc.). The current annualised change in the US is actually even greater: 4.1% or a nice US$730billion increase from a year ago.

David Roberts: 730 billion reasons to be cheerful

Sure it’s easy to worry about tariffs and trade - about the negative impact on business confidence and investment and a spill-over effect to the consumer.

But perhaps if Draghi, Carney and Powell concentrated on some of the economic facts and reminded people there are at least 730 billion reasons to be cheerful, they might be surprised at the impact on confidence and consumption.

 

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, August 1, 2019, 2:45 PM