Simon Edelsten, manager of Mid Wynd International Investment Trust (MWY)
The main concerns this year have been rising rates and a broad range of trade disputes, something we see continuing into 2019.
As expected, US interest rates have risen. The 10-year treasury yield is just under 3.1 per cent, having started the year around 2.4 per cent. This move higher has not resulted in the de-rating of the equity market that many commentators predicted. The rise in yields, to our mind, reflects the ending of quantitative easing (QE) and this adjustment may take up to 3.7 per cent or so. Further yield rises would be needed if consumer price inflation were to tick higher, but this – and wage inflation – remains modest for now, as does demand for loans. There are few signs of overheating from this point of view.
Trade disputes seem ‘lose-lose’ to us, but the largest impact so far has been on emerging markets. For global investors, the risk that the US announces sanctions against a country resulting in the value of one’s investment falling as the currency tumbles, makes the reward not seem worth the risk. But these macroeconomic risks have been well-debated and, if anything, the trade issues are likely to be resolved over time. We therefore see no reason to change our belief that selected global equities can continue to deliver steady real returns over the medium and longer term.
In terms of sectors, we think that next year will see an acceleration in industrial automation. Last year many companies delayed plans while they observed how trade talks progressed. Now it is becoming clear that companies that built manufacturing in China a decade ago when labour was relatively cheap see the easy response to tariffs as increased automation of that plant – which had been on the cards anyway as Chinese labour costs went up. So larger, longer-term automation plans are likely to be launched next year.
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