Investment Strategies

Keep Calm And Carry On Investing: Rothschild Pushes Back Vs Gloom

Jackie Bennion, 26 November 2018


At an investment briefing last week, the message from Rothschild’s global wealth management strategist Kevin Gardiner was - on balance - keep calm and carry on, the prevailing gloom has been greatly overstated.

Wealth managers are optimistic about the UK economy after Brexit. They caution that impact investing is not a cut and dried approach but needs careful weighing against the quality of the research and how impact is measured. In its role of advising some of the world’s wealthiest entrepreneurial families, Rothschild & Co says that views on asset allocation will continue to throw up issues among families as they grapple with different generational approaches and priorities to investing.

The briefing at Rothschlld’s London headquarters began with an upbeat assessment of US fiscal health. Gardiner set the tone with a reminder that the US economy is in the second-longest expansion period ever and on track to become the longest expansion in history if US growth continues through to next June.

He gave US fundamentals the benefit of the doubt largely based on a lack of any macro excesses. “The US private sector is still running cash flow positive", something he noted he'd not seen in “recent memory.”

Both households and companies are in cash flow surplus, Gardiner said, and growth continues at a respectable level, with little visible inflation risk. The monetary policy being normalised by the central banks since the financial crisis has been introduced in a slow and coordinated fashion. All in all, “the signals don’t add up to anything dramatic,” he said.

So far so good, if against prevailing sentiment.

The bank sees the quantitative easing now winding down simply as a “crash barrier” that stopped the banks going bust. “We don’t see it as the engine that is driving the economy or a reason for markets to flinch in the final tapering. Take away the barrier and the journey can continue if we drive sensibly,” Gardiner said. 

Politics and trade wars
It is hard to scan the US economy without talking about US politics. But even through the prism of Trump’s unconventional behaviour, the bank’s economic outlook for the US is a glass still half full. 

Last week, the Organisation For Economic Co-operation and Development revised down its global economic gross domestic forecast for next year. Goldman Sachs, meanwhile, has also warned that US economic growth could decelerate into next year.

With tariff noises rattling investors this year, Gardiner says the bank does “take seriously the prospect of a global trade war,” but suggests that it's a risk that can be navigated. “The counter-balance is we get an “economic detente” between China and the US just as the US/USSR reached a political detente under Reagan in the 80s.” He also alluded to how President Richard Nixon, contrary to expectations, soothed relations in the early 1970s with China. 

Gardiner agrees that China tariffs are higher than the rest of the world; and their capital accounts are largely closed. But the country is opening up and liberalising, and has taken more people out of poverty than any other region. The bottom line is that Trump has a point on tariffs, he argues. China knows this, and perhaps more could be achieved if Trump became less abrasive in his public remarks about China. 

The Montagues versus the Capulets
On the topic of Brexit, Gardiner compares UK discourse on the subject to the warring noble Montagues and Capulets in Romeo and Juliet. 
“It [Brexit] is not life-changing economically as both sides are suggesting,” said Gardiner. He agreed the UK needs improved trade deals with the rest of the world.

He views what the UK has negotiated as "very weak” and largely down to size, arguing that the UK needs the EU far more than the EU needs the UK. If the treaty goes through, “It will look soft”, but that won’t always be the case, he said.

The bank is advising investors that the economic outcome of Brexit is exaggerated. Gardiner says the UK economy is strong over the long term: It is liberalised, the deficit is coming down, it has a large population that is still growing, and home to a raft of competitive industries that are not going away.

We are “capable of muddling through in the short term” and the country in the next five to 10 years will be more prosperous, he said.

Impact on the City
Gardiner was not unduly worried about atrophy in the City. UK portfolios are holding plenty of assets from outside the UK; and guidance is suggesting job losses in the city are overstated in the hundreds rather than the thousands. “Passporting” will hit and firms will need to leave London to continue that, but this is only one part of London’s business, he said.

In terms of steering investors, Gardiner disagrees with the contention that bonds are in a bubble, rather “just an expensive asset not worth owning”. He also said the FTSE index of equities’ yield is not low at the moment and stocks are not fiercely expensive.

He did warn that stocks are facing a big “second derivative” effect as corporate profits slow sharply, but they still offer the best chance of inflation-beating returns. From top down, “equity markets are still our focus,” he said.

There was a discussion about the trend – regularly noted by this publication – of interest in impact investing and using money to achieve environmental, social and governance (ESG) goals. The old “religion” of how firms should only focus on maximising shareholder value has given way to a more balanced set of goals, accelerating after the 2008 financial crash. 

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