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If Winter comes can Spring be far behind? Ode to the West Wind by Percy Shelley (1792–1822)

18th Sep 2018

Well, what a few months it’s been. We’ve had the bittersweet football World Cup, lashings of Trump, Boris and Corbyn, plus the 70th anniversary of the most popular and successful institution in the UK, one which is loved unquestionably at home and is apparently the envy of the rest of the world. Yes, that’s right, God bless Sooty. Or, to be more accurate, Sooty Corbett and his supporting family of Sweep and Soo. Whatever would we do without them? The worst bit of news recently has undoubtedly been the brilliant idea from MPs that vaping (the practice that’s even worse than smoking for those unfortunate enough to be in close proximity) should be allowed on public transport and some other public spaces on the grounds that it’s not quite as bad as smoking for you. Why don’t we just go the whole hog and open some crack dens in Mothercare? Oh dear. In this bulletin we address the current economic situation (it’s not as bad as you think) and give advice to any of your children or grandchildren who may be wondering what to do for a career when the robots have taken over.

This week marks exactly a decade after the financial crisis that sent global stock markets into freefall and left many jobless and homeless. Central banks are finally relinquishing their role as the babysitters of financial markets and leaving them to decide their own fate. Although a necessary step, it also brings concern to the eyes of many and hangs like a sword of Damocles over the markets. The healing of stock markets and record-high asset prices have done little to dispel the lack of confidence in what many refer to as the most unloved bull market in history. As the tenth anniversary of the collapse of investment bank Lehman Brothers is upon us, it may be useful to consider where we go from here.

Since 2008, central banks all round the world have pumped an unprecedented amount of money into the global economy and kept interest rates at staggeringly low levels in an attempt to bring it back to life. Markets initially welcomed the move as it rebuilt trust and asset prices began to recover. Fast forward to the present day and the feeling is now that, what was supposed to be a temporary measure, has gone on for too long and with nefarious consequences. The scale of central bank intervention has been so colossal that the four major central banks – the US Federal Reserve, the People’s Bank of China, the European Central Bank and the Bank of England – now hold some $20 trillion in assets on their balance sheets. This is more than six times as much as they did 15 years ago and makes customers of Wonga look like paragons of virtue.

As central banks try to turn the corner their critics say asset prices are now over-inflated and any attempts to reduce their balance sheets will sabotage any economic recovery. But if central banks don’t raise interest rates and shrink their balance sheets they will have little ammunition to fight off a future recession or market downturn. Financial markets understand this vulnerability but are struggling to wean themselves off low interest rates and have grown used to central banks being a backstop when times turn tough. In turn central banks have been very cautious about raising rates for fear of extinguishing the economic growth of many developed countries, with perhaps the notable exception of the US. Ten years on from the collapse of Lehman Brothers global markets are still learning how to operate in this new and more complex post-crisis world. The only cast iron certainty today is that Breggsit won’t make a scrap of difference to almost anyone. Really.

Overall, we believe that problems in countries and regions such as Europe, Turkey, Italy, Argentina and Venezuela are not going to stop the world economy in its tracks nor will the mid-term elections in the US be a gamechanger for the powerful economic engine that is the American economy. With these factors

in mind, we feel confident that investors may enjoy some positive returns in their portfolios over the coming months. There will be bumps in the road of course, but that’s always been the case and it’s nothing to get hung up about, to paraphrase the Beatles. Successful investors know that stock markets in the last 25 years have enjoyed a high percentage of ‘up’ quarters (nearly three quarters of them were up in the period), favourable odds indeed.

John Lewis has been in the news this week for its falling profits, which have gone down by 99% this year. This echoes the bifurcation trends in other industries. Open any newspaper or magazine and everyone is talking about millennials. It’s the latest buzzword; but why? Why do millennials matter? Millennials and Generation Z (roughly spanning those currently in their teens to late-30s) each number about 2 billion out of a total population of 7.4 billion and, as birth rates fall, they are likely to remain the biggest segment of the global population. They are the future wealthy and their behaviour is already steering consumer trends. They have grown up with the internet and social media as part of their daily lives. Their behaviour and spending patterns are completely different to previous generations and this change creates both challenge and opportunity for brands seeking to engage with them. Companies must be agile and innovative to remain profitable. The threat is perhaps most acute for long-established brands like John Lewis, whose reputation has been painstakingly nurtured over decades. These brands have historically commanded consistent loyalty and predictable consumer demand, but they now must adapt to continue to appeal to millennials and Z listers.

Customers are buying artisan, high quality products that merit higher prices or else they are consuming bargain-basement, cheap mass-market rubbish from Primark. You buy a £6 pint with notes of banana and gooseberries or 24 cans of cheap lager from Lidl. You buy 200ml bottles of Mediterranean tonic to bring out the thyme and rosemary botanicals in your gin, or you buy cocktails in a can for 65p. The middle ground (John Lewis, M&S, Debenhams, House of Fraser etc.) is toast. As investors it is vital that our carefully selected fund managers recognise these seismic shifts in consumer behaviour and turf out the old but highly recognisable names that fail to either spot these or are unable to react.

If you are ever asked by friends or relatives to give career advice, you can tell them that the economics of how we live haven’t changed in the last ten years, but how we make a living has changed fundamentally over the last decade. We recently visited the web site of a large investment management firm in London that looks after clients who must have at least £10 million to invest before they can become a client. There were some testimonials on the site from clients who have made their fortunes in business. The interesting thing to us was that, after reading the various success stories, we had virtually no idea what they were talking about. The business models in this new digital economy were so far removed from traditional ways of making money that they were, to a technologically uneducated reader, almost completely indecipherable. But they did all have one thing in common. The firms had been set up by people who had no intention of working for anyone else. Technically they were unemployed. They didn’t have a boss. But they worked very hard every single day. When you work for yourself there is no one paying attention to what time you show up in the morning or what time you leave in the evening. There’s no one to tell you how to do your job. No one is breathing down your neck pushing you to do more – sell more, earn more. As an entrepreneur, that’s all up to you.

Being an entrepreneur is not a conventionally respectable career path. Just a few years ago, you might have considered yourself a failure if you didn’t get into university. Setting up your own business meant that Plan A must not have worked out. Your family would shed a tear for you. Today becoming an entrepreneur has catapulted to Plan A status. Even though the “real” jobs of a decade ago are still around (for the moment), the world has awoken to the idea that, since everyone has to pay their bills, their rent or mortgage, you no longer have to follow your parents’ direction for how to make a living. You can – gasp – work for yourself to pay those same bills.

The landscape facing new graduates today is challenging. University graduates are entering a highly competitive job market. The unemployment rate for graduates is higher than it was in 2008. Gone are the days of receiving a job offer before you walk off the stage with a diploma. Graduates aren’t the only ones who are struggling of course, thousands of school leavers enter the workforce every year and they’re likely to earn less than half of what graduates are earning. And how are you supposed to save for a deposit on a home if you already have a mountain of student debt? But the good news is that young people don’t have to wait for someone to give them a job to be able to take control of their lives. You don’t even have to wait until you’ve graduated. Anyone can become an entrepreneur at any age. It’s not easy of course, you need passion, commitment, determination, enthusiasm and sales skills to name but five, but you never know what you might accomplish until you try.  If only we were ten years younger. 

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