The confluence of events around the world possibly suggest that although the future looks very dismal in the short term, the reality may be that we are at the bottom of the economic curve and that all indicators lead to a more positive outcome in the next few years. This of course is triggered, to some extent, by an increase in US interest rates which was treated positively by the markets.

Let us look at some of the key indicators:

Interest rates and US dollar strength

It is clear that he US dollar is overvalued on a global basis as a consequence of its position as an asset of last reserve. With rising interest rates, it could be argued that the dollar would strengthen. But on the other hand, rising interest rates and a strong dollar makes US exports less attractive. Of course by raising interest rates the US are trying to slow down economic expansion in order to avoid the normal outcome of very low interest rates which of course is inflation.
We think the US economy will continue to perform reasonably well, but from a sterling perspective and from a global perspective, a reduction in the strength of the US dollar will actually be quite positive for your investment portfolios.

Emerging markets

Emerging markets, we believe, to be in a much stronger position to cope with interest rate rises in the US than the market currently perceives.

Remember that approximately 60% of the global population live in emerging markets. They have a much younger, dynamic population and of course it is youth that ultimately creates economic gain. Yes, it is perfectly possible to quote all sorts of examples of huge dilemmas in Brazil or China or Russia, but the reality is that despite all of the calamitous events in the world, these economies have not imploded and continue to trade reasonably well albeit with very difficult circumstances.

Energy prices

What we may think about collapsing energy prices (we think that the oil price will probably hit $30 a barrel before it recovers) the reality is that this ultimately feeds through into economic growth. It also has to be recognised that one of the reasons that oil prices have fallen so far is the dramatic advance in technology and alternative means by which we generate energy at much lower costs in a much more carbon efficient environment. We are becoming very efficient at saving energy as well, all of this contributes to a better economic outlook in the future even if we are mired in the fog of confusion at the moment.

Migration

This week’s summit in Europe does not show any clear outcome, but the reality is that it is now the ultimate important agenda item in every single European country. Therefore when there is unanimity on one issue, something is likely to happen. The outcome for migration going forward is likely to be more positive and this will help to stabilise economic growth and a better policy for us all in Europe.

Brexit

It is impossible to know whether Britain will leave the EU or not but what is absolutely certain is that whichever way we go, we are damned if we do and damned if we do not. At the same time, every market maker will tell you that there are investment opportunities in either direction and the trick for us will be to exploit those market opportunities (albeit modestly because we will not take significant risks) with the aim that your portfolios remain positive whatever the ultimate outcome of our negotiations and the referendum may be.

Stimulus

Despite an increase in interest rates in the US (bear in mind that they have only now got back to where UK interest rates are at 0.5%) the reality is that stimulus in the global economy will continue. Draghi is printing; Abenomics in Japan continues; we are expanding the monetary base and effectively the world is being run by central bankers not politicians. It seems to us unlikely that any part of the global system is going to stand out of line because in so doing that country will be isolated and suffer financially and therefore unanimity across global economic activity is likely, in the end, to prove rewarding.

The Middle East and terrorism

We now seem to have a coalition of the willing, albeit in a confused environment, with Russia working with other powers to reduce the impact of terrorism, this again is likely to be an economic stimulus to the rest of the world.

Ultimately of course we all know that the only way that we can improve the conditions for everybody is through education; there is no point in throwing bullets and bombs at each other; we have to educate ourselves to live more efficiently and in harmony. We have to improve the wealth of all nations so that they are less disgruntled and have less to complain about.

If you consider why Britain does not rise up against its politicians, it is because we have significant apathy as a consequence of relatively high standards of living. Ultimately the world has to achieve the same high levels of lifestyle so that we all become less disgruntled about our leaders and of course we also have to reduce the imbalance between rich and poor.

Ultimately, the only way of out of the crisis is through peaceful harmony and this requires significant global economic growth and this must therefore be food for investment returns.

Interest rates

Finally, interest rates will start to revert to some sort of normality over the next 5-10 years and therefore it is wise for KMG to have reduced its involvement in fixed interest funds because these assets will ultimately decline in value and some assets could become worthless as we revert to normality.

A long term, broadly spread equity orientated investment strategy on a globalised basis will ultimately produce a very good investment return with much lower volatility. We must just be patient to allow these issues to manifest themselves.

2016

We wish you a very happy 2016 and we will continue to work as hard as possible for you and your investment returns as we have done in the past.

Patrick McIntosh

17th December 2015