The Sage of Henley

The famous and highly successful US investor Warren Buffet is commonly known as the Sage of Omaha. He is noted as a shrewd and long term investor with a strong focus on value. He is also the source of insightful and humorous sayings on investment. It is worth googling and reading his quotes but two of my favourites, I have paraphrased, are:

“Rule 1 of investing – never lose money. Rule 2 never forget rule 1.”

“It is only when the tide goes out do you see who is swimming naked.” This is a reference to the scenario where market conditions are good and all investments do well. QE for example has lifted asset values indiscriminately. However when conditions deteriorate then you discover which are the good and bad companies.

Less well known is the Chief Economist of Invesco Ltd, called John Greenwood. He writes on the global economy and undertakes web based Q&A sessions with advisers. Although his delivery is dry and he lacks humour, he understands the big picture and addresses key economic questions succinctly and clearly with insights that are sharp and ring true.  So this morning after listening to a Greenwood podcast I have decided to award him the title of the Sage of Henley. Arise Sir John.

Here is a random sample of his economic insights from the podcast in my own words:

*The global economy is still at an early stage of recovery with balance sheet repair still occurring. The corporate sector has more flexibility to deal with debt than the consumer, for example by refinancing loans, selling assets and cutting labour costs. Although global trade has been flat in recent years companies have been able to grow their earnings. In contrast the consumer, notably in the UK has been limited by low wage growth.

*The US is further along the process of balance sheet repair and economic growth for the year to the end of the third quarter has been revised to an excellent 3.9% p.a.

*Imports account for just 15% of the US economy, in the UK it is double this. This means the US is fairly well insulated from the global economy and high commodity or other import prices. Naturally the rise of shale gas production in the US and lower global crude oil prices are a tailwind to the US economy.

*Whilst the dollar has been rising and global demand falling, both of which are ordinarily bad for exporters, exports only account for about 12% of the US economy. Again this is a positive.

*China’s economic growth may fall from 7.5% p.a. to 6% p.a. in the next few years. Wages are too low to rebalance the economy from export and investment led to the consumer. China’s imports are still driven by commodities and plant rather than domestic demand for consumer goods.

*Abenomics, the economic policies of Prime Minister, Shinzo Abe has had one real benefit, driving down the value of the Yen. As previously explained in an earlier blog post this is good for Japanese exporters and for the Bank of Japan’s inflation target.

*Monetary policy including QE has been more effective in the US and UK than Europe and Japan. Resistance to full blown QE in Europe is mainly due to German fears of inflation. German memories of money printing and hyperinflation in the 1930s are deeply ingrained despite evidence to the contrary, for example in Japan where buying government debt has not fuelled inflation. However Greenwood does expect the European Central Bank to undertake QE.

*Interest rate rises in the UK are unlikely to precede those in the US as they would lead to a stronger pound and impact on UK exporters.

*Equities and bonds have risen in the early stages of the recovery. As it develops equities are expected to outperform bonds as the latter will be impacted by higher inflation and interest rates.

So what do I conclude? Global economic recovery is still patchy and anaemic but equities are still a good long term investment. The US remains a favoured stockmarket for me despite the high valuations. Europe could get a boost from QE. Wage growth in China is required to provide a boost to the global economy.

This blog is intended as a general investment commentary.  You should seek individual advice before making investment decisions.