The Chief Investment Officer (CIO) Panel is always a much-anticipated highlight at the Dynamic Planner Annual Conference. This year in Manchester, journalist, broadcaster and host Gavin Esler expertly steered a fascinating and, as ever, fantastically well-informed debate which compellingly encompassed China, global economic slowdown, 2018 regrets, 2019 forecasts, the US Federal Reserve, Brexit and more on Brexit.
Below are some of the many highlights from a brilliant 60 minutes at Manchester Central in late January
Gavin Esler: To begin with, if I may first ask, where do you each see markets heading in 2019 broadly?
Jason Borbora (Investec): I think 2019 is going to be a pretty tough environment. Most investors, I think, are faced with a quite stark choice: either we are at the dawn of a correction in a bull market, where you want to up your risk exposure; or it is time to really think about defence in your portfolios, which is certainly what we are doing with our portfolios at Investec.
Marcus Brookes (Schroders): Echoing Jason, 2018 was certainly the start of something not that pleasant and funds we manage at Schroders have been pretty cautiously positioned for a couple of years now. In 2017, assets still went up, but in 2018 if you managed to deliver a positive return you did a cracking job and if you even preserved your capital you did very, very well.
Abhi Chatterjee (Dynamic Planner): For me, in 2019, investors really need to know what risk they are taking, whatever markets they are in.
David Jane (Miton Group): Clearly, markets have moved from a position of extreme optimism over the last decade and are now entering a position of cynicism. Quite clearly, this is a risk environment where you want to be very selective on the assets you own. However, for me, bear markets, if we are now in one, do not go on for an extended period. I think naturally there will be market lows in 2019, but I would honestly be surprised if actually in 12 months’ time we are not looking at positive returns in equity markets.
Guy Monson (Sarasin & Partners): I think 2018 was when we got a taste of what it’s like investing without central banks behind us.
Gavin Esler: Is there anything, looking back, in 2018 you wished you hadn’t done?
Jason Borbora: I think we could have done more and perhaps been a little more aggressive, to produce more positive returns. But, ultimately, there is always that risk that if you over-hedge you can swing the bat, so to speak, too much.
Marcus Brookes: 2018 certainly was a year when it seemed that central banks didn’t have your back. Jerome Powell, chair of the US Federal Reserve, made an off the cuff remark on 3 October that was: “We’re a long way below neutral.” The market did not like that at all, because suddenly it realised that the US Federal Reserve Chair was a proper markets guy, not an academic.
Trump didn’t like it either, because markets went off and you’re not making America great again if national wealth is going down. Jerome Powell was basically saying to both markets and to Trump: ‘You can’t bully me’.
David Jane: At Miton, we like to say that we’re hugely pragmatic investors, but where pragmitism went wrong last year was the move from quantitative easing to quantitative tightening and the impact that had on the psychology of investors, where, as I said, cynicism now reins. For example, you can look back to 2000 and when the tech bubble burst – but economies didn’t slow down until several years after. A similar scenario could happen now. But what did change in 2000 was market psychology.
Gavin Esler: We are going to have to talk about Brexit – so what are the obvious challenges we are going to face this year.
Guy Monson: I am going to be controversial and say that I am rather an optimist for the UK. But I am concerned about the challenges it means for all of us sat here today. I have sat in asset allocation meetings in Europe and of the hated assets currently one of things most investors dislike are all things British. I wonder then if in fact the UK then goes from pariah to something of a safe haven. Currency is cheap; our employment markets are extraordinary; and asset markets are incredibly undervalued. I think the international investor therefore will come back to the UK.
David Jane: The market has known about Brexit for two years now and, as Guy said, it’s quite clear international investors are max underweight in the UK currently – and currency traders are max underweight in sterling.
Emiel van den Heiligenberg (LGIM): You have to think about the negative impact of what a hard Brexit will be for your clients. For example, I can tell you now that the London housing market won’t react well if there is a hard Brexit. There is a probability of a 10 per cent fall in UK holdings in the event of a hard Brexit, so you can probably pull out of positions which you know will most likely see clients lose money.
Marcus Brookes: Over the last 20 to 30 years in UK politics, we’ve always had a centre-right party and a centre-left party. But now we have politics of the extreme, so if you are an international investor looking at the UK and valuations of its companies, you have to factor that inherent risk in now. Before, because the UK is a well formed, capitalist economy, those same investors could largely ignore the political backdrop.
Gavin Esler: That’s a very interesting point. I spend a lot of time in Europe and people and newspapers in Europe aren’t paying too much attention to Brexit. But what they are paying attention to is the idea that this very competent country, the UK, is not as competent suddenly. Is that at the heart of this now?
Marcus Brookes: Yes, I think it is. The UK has largely previously been a liberal, capitalist economy, but now you have a leader of the opposition in Jeremy Corbyn, who is saying, ‘You own shares in something. I’m going to take those from you without recompensing you – at all’. We need to somehow move the political landscape here in the UK back to the middle ground. Unfortunately, at the moment, that doesn’t look like happening.
Jason Borbora: From a fund manager’s perspective, I don’t think you’re going to make any money from trying to guess what will happen regarding Brexit.
Marcus Brookes: At Schroders, we think there is some sort of economic slowdown coming. China’s growth has slowed and if you broadly think that China is the world’s factory and other leading economies like Germany’s produces machines for China, which then produces goods to sell to the US – the world’s supply chain could be showing signs of a slowdown. But slowdown doesn’t necessarily mean recession, which we don’t see being here for another year or two.
(Question from the audience) If Chinese growth is slowing down, how do you go about selecting Western companies, who will continue to be very good in that climate at selling in to China?
Abhi Chatterjee: I have always been a big believer in buying what China wants to buy, but I do think that China and Emerging Markets are going to provide the growth factor within your portfolios going forward. Yes, there is risk there, but there is also opportunity.
Guy Monson: I think there are two factors here in answer to the question. One, there is something odd happening to the typical Chinese consumer – for example, we’ve seen China’s worst car sales figures in 30 years, so the old way of selling well branded Western products into China is going to be more difficult. Therefore, I would say, follow the politics and look at which sectors in China are set to liberalise and which markets there are set to open up.
(Question from the audience) What would be the impact of a no-deal Brexit on the UK economy?
Marcus Brookes: There clearly is a chance of a no-deal Brexit and no-deal would not be good for the UK, it’s as simple as that. We’ve had a 45-year trading relationship with the EU and, even though I have no doubt the UK will be okay eventually, you’re not going to unwind 45 years in two. We need some sort of transition deal.
Guy Monson: I think, if there is a deal, Brexit repercussions will pass relatively quickly – despite it being currently tense and despite there being a lot of grandstanding from certain people.
Jason Borbora: Obviously, Brexit has been a topic for markets now for a long time, but around Brexit I have to be honest and say that I find it very difficult to say anything useful around it! As a fund manager, you can ask yourself, ‘Okay, where do I find growth in this climate?’ At Investec, we flip that question around and say we’re not trying to find growth, but going to allow income to help generate positive total returns.
David Jane: I would like to answer the question with an anecdote. We’re all obsessed with Brexit and have immersed ourselves in it because it has dominated the news so completely lately. I was speaking to a friend recently who owns a small restaurant chain in London and one which has enjoyed huge growth thanks to growth in home deliveries.
He asked me: “You’re in financial markets: what about Brexit; what’s going to happen?”
I said: “I haven’t got a clue,” before adding: “But what will you do if there is a Brexit deal?”
He said: “Mate, I’ve got such high demand for what we’re doing, I’ll have to open a new factory.”
Then I said: “Well, what will you do if they kick the can down the road and postpone Brexit?”
He said: “Mate, I’ll have to open a new factory, because I’ve got such an increase in demand.”
Then I said: “Well, what will you do if there’s no-deal.”
He said: “Mate, I’ll have to open a new factory.”
(Loud laughter in the room.)
I said: “Why haven’t you opened a new factory already?”
He said: “Because of Brexit.”
That’s a long way of saying that we’re in this funny place where we’re holding back from making decisions. Hopefully, once this is all done and God forbid it goes on much longer, lots of investors and home buyers and so forth will start making decisions again.
Emiel van den Heiligenberg: We shouldn’t kid ourselves that the lack of investment here in the UK is actually happening now. The transfer of financial activity to be it Frankfurt or to Paris is actually happening; car production moving from here in the UK to Europe or to Emerging Markets is actually happening – and it’s not coming back even if we get a deal on Brexit. Some of the rot has already set in – and we can’t reverse it.
Thank you to our panellists linked below.