12 June 2019

How are the mighty fallen?

Shares have held up reasonably well recently, helped by President Trump cancelling the proposed tariff on Mexican goods and expectations of more central bank easing.

Of course, the fact that the Federal Reserve Bank, amongst others, feels the need to cut interest rates is of itself rather worrying. Trade is at the centre of concerns, with still no sign of an agreement with China. But at least they are still talking. Trump clearly believes the Chinese cannot afford not to do a deal. Let us hope he is right.

Perhaps the best indicator of the headwinds facing the global economy has been the publication of the latest Purchasing Managers’ Indices. These PMIs, as they are known, are considered to be one of the best forecasting tools for future economic activity. Unfortunately, recent data purchasing managers have logged to indicate what they are buying to meet expected demand suggests they are becoming more cautious and may be anticipating a slowdown – hence central banks looking to be more prepared to prime the economic pump.

Elsewhere, sterling remains in the doldrums, with the Conservative leadership election not exactly helping. It will take a few weeks before paid up members of the Party cast their vote on who they want to see leading the country. Boris Johnson remains in pole position, but these battles have in the past produced some quite unexpected results. Quite what the eventual outcome of this contest might mean for our departure from the European Union is far from certain. For the present it does not seem to be impacting on investor confidence. Indeed, conditions remain remarkably quiet on a number of fronts.

And this despite the fall from grace of one of Britain’s leading fund managers. The speed at which Neil Woodford’s investment empire started to unravel caught everybody by surprise. It serves as a reminder that nothing in the investment world is set in concrete. The final outcome is hard to foresee, but the implications may not be as serious as some fear, though it does highlight that unquoted companies are not best suited to open ended investment vehicles. It also underscores the much-used adage that past performance is no guide to what may happen in the future.

The investment world can be quite unforgiving at times. A period of sub-standard performance for the Woodford flagship fund encouraged redemptions which then exposed the illiquid nature of the portfolio. In such circumstances the decision to suspend redemptions becomes understandable. How speedily the situation can be stabilised will depend in some measure on the behaviour of those vultures presently circling the embattled fund. Such a turn of events is far from desirable, but doubtless lessons will be learned and eventually order will return, with those wishing to cash in able to do so. How Mr Woodford might recover his reputation subsequently is a different matter altogether.

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