Every week our guest blogger, David Oakes of Mosaic Money Management (aka The Financial Ironmonger), shares with us his take on some of the major UK and overseas macro and political events that shaped the previous week.
Please be reminded the value of investments, and the income from them, may fall or rise. The views expressed in this article are those of the author at the date of publication and not necessarily those of Chelverton Asset Management Limited or Mosaic Money Management. The contents of this article are not intended as investment or tax advice and will not be updated after publication unless otherwise stated.
–THE FINANCIAL IRONMONGER BLOG NO 21/2018–
London this week to meet a manager of a US Smaller Companies fund, who had come in from Boston; small is actually quite large to us, but they tend to be quite domestically orientated, a common feature. He reckoned that they would see 30% earnings growth in calendar 2018, falling to “high single digits” next year, as core inflation and interest rates rise, the later to combat the former.
Part of the problem is the oil price, which has risen some 60% over the last twelve months, albeit that it is down some 5% today. You would think that this is a fracker’s dream come true, but two things have happened. Firstly, the companies, their bankers and investors have become more cautious after the boom and bust of the last cycle.
Much of the new activity is concentrated on the Permian Basin in Texas, which some think could be the largest oil field in the world, now producing 3.2mn barrels a day, out of a total of 10.2mn nationally, the highest since records began in 1920. Which leads to the second problem.
They cannot get the stuff produced out of there, and whilst new pipelines are being laid, they are unlikely to be in place before the end of Q1, 2019. The alternatives are tanker trains, or trucks, the later suffering from a dearth of drivers. Production is therefore being held back, which is why the oil price remains high, but he felt that it would fall to $50 from the present $70, one this log jam is removed.
This would suit most producers; the oil majors seem to have chosen this level as the base case for investment going forward, but it is not high enough for the Russians and Arab States, who need $80 minimum. Another manager I talked to reckoned that the value of outstanding options in the oil market was the highest ever, nothing to do with supply and demand, but pure speculation, hence the volatility in the price.
What interested me more was the man from Boston predicting a sharp slowdown in the economy next year, as the one off sugar rush of the Trump tax cuts fade. It is already a tough backdrop. Interest rates up, together with inflation, and now Quantitative Tightening, (QT), the opposite of QE, the magic money that fuelled the rise in asset prices these last ten years.
Residential property in central New York is reported to be down 20%, much as it is in London. The former might be a Trump discount, the later a Brexit effect, but there can be no doubt that the very high end buyers from Russia, the Middle East and China have taken fright at the change in the political mood, given that their bank accounts could be frozen, and their assets seized. Monaco might be the place to buy, where the sun never manages to penetrate the deep vaults underground.
Meanwhile, the Donald has had a busy week; whilst we were watching the marriage of an Englishman to an American lady, thus strengthening the special relationship, the trade war with China has been put on hold, after they agreed to buy $200bn of goods and services annually, thus dramatically reducing the trade deficit, which stands at $350bn. There was not a lot of detail, but it is a welcome step back from naked aggression, and markets took it that way.
The third part of this three-legged stool is North Korea, (wholly dependent on China), where talks on denuclearisation have been suspended, presumably whilst the trade deal is sorted out. Whatever view you hold of the Donald, he is getting through his list of campaign promises. Perhaps people find this unsettling because it is so rare.
Next week, I shall be staying in the mountains, thirty miles west of Cork, Eire. I very much doubt that the vexed question of the hard border, thrown up by Brexit, will be top of their list of concerns, but it ought to be. The government have chosen to align themselves with the intransigent views of Brussels, instead of urging a compromise, which is odd, given that they have far more to lose than anyone else.
–MORE ABOUT OUR GUEST BLOGGER, DAVID OAKES–
David joined Manchester stockbroker Henry Cooke, Lumsden in 1977 and after becoming a member of the London Stock Exchange in 1984 held a number of senior positions within the firm including Managing Director of the in-house fund management company and member of the Executive Committee.
After senior appointments at Cazenove Fund Management and latterly Mercater Capital Management, David joined Mosaic Money Management in 2013. He has successfully managed private client and fund portfolios for over thirty years and has particular expertise in providing a multi manager service to his loyal client base.
The Financial Ironmonger is a hat-tip to Ironmonger Lane, the location of Chelverton’s London office.