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The TCFP investment committee met on 10 June to discuss the current economic, political and investment environment.
As a result, the TCFP Model Portfolio remains unchanged. Here are brief notes of our discussion:
Politics
Despite what you might read we’re not all becoming fascists, instead the predominant left of centre hegemony has lost a bit of ground to the right of centre camp.
Yes, the rhetoric might change, but when it comes to the economic policies that matter most next to nothing will be different with this slightly changed order.
In the UK Rishi has opted to take his severe beating sooner rather than later (so as not to upset his Summer holiday plans?) and in the US the soon to be overturned felony convictions of the ex-President have probably made his re-election a bit more likely.
The Ukraine war has found an equilibrium. For the West, Russia winning or being properly defeated are equally risky outcomes both leading to a likely escalation. We expect a negotiated settlement, but no time soon.
The Israel / Hamas ware will conclude with Hamas destroyed. The bigger picture is what Israel would like to do with Hezbollah (for which it may get some support) and to Iran (for which it will get no support at all).
And last, but not least, the China / Taiwan tensions continue to mount, this could have a severe effect, more so than other conflicts.
Interest Rates & Inflation
At the beginning of the year every man, woman and dog had expected multiple reductions in the US interest rate. 6 months later and the markets give it a 50:50 chance of happening.
Inflation is down, but not stably so, and so the Fed does not feel compelled to act. We still expect one drop this year, but many don’t.
Europe has already cut interest rates, whilst also upgrading its inflation forecasts. In the UK we could conceivably see two or three cuts.
Inflation appears to have been tamed, even if it isn’t at the level most central banks would like it.
In the UK inflation is being led by services inflation (wages) rather than good inflation which is actually dropping.
GDP
The UK is out of recession with GDP growing by a better than expected 0.6%. However, GDP per head is actually falling in the UK. Whereas in Japan the opposite is happening – GDP is down but GDP per head is up.
Not much notice has been given to “per head” GDP historically, perhaps that will start to change, it seems to us a more sensible measure of economic growth.
The US is bowling along with decent growth, but that’s to be expected as their economy is the closest thing to a free market as you can find. Europe is not bowling along (although Germany is now out of recession) most likely because it is not a free market and has no interest in being one.
TCFP Model Portfolios
If all of the above (especially the politics) sounds meaningful and a cause for concern you would be right. But not in the context of how your money should be invested.
The global economy made up of thousands of companies and many millions of employees continues to create wealth for all. The 8,500 or so strong, profitable companies that you are a part owner of continue to grow your money for you.
Despite the odd hiatus here and there we don’t ever expect that to change. Our reading of where we are at the moment is that things are neither running too hot, nor too cold.
We will continue to take profits where we need to provide income, but we do not need to be either overly cautious or optimistic at this juncture.
We are, in short, happy with our 80:20 equity:bond split, with enough cash to one side to cover the next 1-3 years of spending needs.
The 80% in equities is split 40% in large companies, 30% in smaller companies and 10% in emerging country markets. We are also happy that this split is serving you well covering as it does all the major economies and companies around the world.
And that concluded June’s meeting. The next ICM will be in September.