Q So, Alastair, let’s talk about Brexit. Over the past year it must have presented extraordinary challenges, but also opportunities?
I think the main challenge is that events like this paralyse investors. Investors are always desperate for certainty and uncertainty really knocks them for six. Consequently, they either don’t do anything at all or they sell anything where they see too much uncertainty – that can be certain sectors and certain stocks. So yes, it has given us opportunities. I always think anything which creates volatility creates opportunities – as simple as that.
I replace the word Brexit with recession because there is too much political emotion in the B word. We have seen recessions before, and we know they are reasonably short and the growth periods around them are much longer. The important thing for us when we are looking at companies and sectors is whether these companies make it through a recession and do they look cheap on a more normalised economic backdrop? That is really the way we have been looking at it.
Q Let’s look at the 2020 scenario. From an investment perspective, how do you see it when it comes to risks and opportunities?
For me, I think perhaps the UK election might not be nearly as important as the US election, where I think the likelihood of a Democratic winner, and particularly Elizabeth Warren, is completely understated by investors. Investors don’t seem to have moved onto that at all.
I think, in both the UK elections and the US elections, we will see promises of a spend fest by both sides of this electoral community. The winner may be the party that convinces most people it can deliver and afford its promises. Governments haven’t necessarily got this money to spend and they won’t be promising any tax increases to pay for this. I think the implications of these elections are increased government spending, increased government debt and therefore an oversupply of bonds and I really don’t think this is being focussed on enough by investors.
Q Let’s look forward to the way that you are positioning your strategy for 2020.
Given consensual fears of the Japanification of western economies, i.e. low interest rates, inflation rates and economic growth for a number of years, we prefer to take a contrary position and believe there could be a significant risk of bond yields and inflation moving higher. Therefore, our portfolios are positioned for that.
We have equities which will benefit from upwardly sloping yield curves, i.e. longer-dated bonds having higher yields than short-dated bonds. That would be good for financials and we also own precious metals. We have gold and silver exposures because we think that central bankers and perhaps the politicians are going to decide to take a risk with inflation – allow inflation to ‘run hot’ to try and revive economic growth.
So rather than worrying about a recessionary bust, which is what I think a lot of investors are talking about, we are concerned that we could end up with an inflationary boom. If that is correct, a lot of portfolios are completely incorrectly positioned.
Q That is quite a bold statement. Lots of people are saying that the stance that you have just taken is completely wrong and just let the momentum of 2019 and, indeed, 2018 continue, but you are being almost contrarian I would say.
As a contrarian, I think what has happened is everyone has become a recession-spotter and everyone is desperate to call, in particular, a US recession. But I think we are done with that. I think the question is how the authorities will react to the recession and I am suggesting they will react with fiscal policies. They have seen what happened in Japan and they don’t want a Japanese-like result so they will do everything they can and pull all sorts of clubs out of the bag to try and introduce inflation into the system. My belief is markets will either ultimately see that inflation as inflationary or it will actually be inflationary and that is bad for bonds.
All investments carry the risk of capital loss.