Regular readers will know this column has long believed policymakers would struggle when trying to foster economic growth. With little left in their policy armoury, central bankers have become increasingly irritated at what they see as government inaction in helping to stimulate growth. Into this void has stepped the electorate. Brexit and the election of Donald Trump will, in their different ways, lead to a sufficiently meaningful stimulus in both countries from which well-placed investors could benefit.
People power
Central bankers are faced with an economic downturn unlike any other in recent history -- in large part caused by excessive debt. In their efforts to stimulate economic growth, measures once considered radical - persistently low interest rates, quantitative easing (QE), negative interest rates - have now become the norm. As a result, various asset prices have been distorted and yet economic growth has disappointed.
Accordingly, central bankers have become frustrated at governments' unwillingness to do more of the 'heavy lifting' and introduce initiatives on the scale needed to stimulate economies. Governments have been found wanting. Meanwhile, the debt still mounts and growth remains too pedestrian relative to the task in hand.
History suggests that, in such circumstances, major policy initiatives are needed on a scale that surpasses the remit of central bankers. In the absence of a major external 'shock', such as war, which helped pull the US out of the Great Depression, there are a few policies that only governments could pursue in sufficient scale - short of a co-ordinated debt default. One is a major currency devaluation; another is significant fiscal stimulus.
While an intended consequence of QE is to weaken a currency, until recently there has been little relative advantage for any country as most policymakers pursued the same QE policy. As for fiscal stimulus, governments have up to this point tended to believe belts had to be tightened if debt was to be reduced, despite the fact that vast swaths of the electorate have been left behind economically in recent decades. And yet the debt has continued to climb and the remedies have continued to disappoint.
Into this void the electorate has stepped and, in effect, provided fresh answers - the 'tyranny of the masses', as some in the establishment have described them, are now having their say. Political change in two of the world's greatest democracies has ushered in policies on the scale needed to make a meaningful difference to economic activity - time will tell whether this practice catches on. And, whisper it gently, but many policymakers, including central bankers, are relieved - if not a little too sensitive when discussing it.
The Brexit vote has resulted in a major devaluation of the pound. As suggested in last month's column, the pound's weakness is long overdue as part of a policy to 'rebalance' the economy. A dominant financial sector and strong pound has squeezed our manufacturing competitiveness, investment and productivity. British factories saw their best month in three years in September, as exports surged - and the stock market has taken note.
Expect more good news on this front. 'Remainers' may bemoan the pound's fall, but it was largely this same segment of the establishment and media that called on the UK to remain part of the ERM in the early 1990s, and then were silenced by a strong period of economic growth following the pound's weakness when we left. Coincidentally, it was largely this same group that had argued for us to join the euro - subsequent evidence suggests we should be thankful they failed.
Meanwhile, the victory of Trump over Clinton in the US, whatever one thinks of some of his other policies, may sufficiently lift the economic growth rate. Promises of a significant deficit-financed stimulus - including a 10-year $1 trillion infrastructure plan - and a 'bonfire of the regulations' that so often stifle enterprise, could indeed double the country's economic growth rate with a little help from inflation. Again, the stock market has taken note.
How should investors be positioned?
Existing central policy initiatives continue to be blunt and may yet have unforeseen consequences on a global financial system that is not yet back up to full health. While a general withdrawal of liquidity would affect the price of most assets, investors should ensure they are adequately diversified relative to their risk profile and investment time horizons. It is no accident that the portfolios have increasingly pursued this theme over the course of the year.
Furthermore, the portfolios are increasing their exposure to the US and to 'value' stocks in general. 'Growth' shares have done well over the past decade in part because they have been less dependent on the domestic economy when generating growth. Faster growing economies in the UK and US could translate into rising stock markets but, regardless, should favour 'value' over 'growth' in relative terms. This tilt towards 'value' is also helping to diversify the portfolios' equity exposure.
Portfolio changes
Accordingly, during November, the portfolios saw the introduction of North American Income Trust (NAIT) when standing on a 10 per cent discount and offering a 3 per cent yield. The value-driven style of the new management has made a good start at improving performance. Reducing the portfolios' underweight position in the US acknowledges not only a potentially faster growing economy, but also a strong dollar given Trump's pledge to boost US oil and gas production and the likelihood of tighter monetary policy. NAIT will be covered in next month's column if space allows.
Similarly, The Merchants Trust (MRCH) was introduced to the Income portfolio during November when offering a 5.7 per cent yield - the website www.johnbaronportfolios.co.uk has more details as to its merits and 'value' approach.
Otherwise, existing holdings were topped up. Perpetual Income & Growth (PLI) and City Natural Resources (CYN) were added to within the Income portfolio, as were Finsbury Growth & Income (FGT) and Golden Prospect Precious Metals (GPM) within the Growth portfolio - the increased 'commodity' exposure helping with diversification.
These purchases were funded by the top-slicing of JPMorgan Japanese (JFJ), Henderson Far East Income (HFEL) and JPMorgan Mid Cap (JMF) in the Income portfolio, and the sale of Aberforth Geared Income Trust (AGIT) and the top-slicing of JPMorgan Japan Smaller Companies (JPS) in the Growth portfolio - after generally strong runs. AGIT remains within the website's Thematic portfolio.
Together with the change in the portfolios' bond policy during August and September, which saw a significant reducing of exposure, and the increased focus on diversification, the increased exposure to the US and 'value' shares represents another key change to the portfolios' investment strategy this year. These are indeed interesting times.
John Baron waives his fee for this column in lieu of donations by Investors Chronicle to charities of his choice. As these are live portfolios, he has interests in all of the investments mentioned
