“May you live in interesting times” – an English expression purported to be a translation of a traditional Chinese curse

We are certainly living in interesting times.  If you look at a range of financial market measures for the first week of October, the tech-heavy Nasdaq index had its biggest weekly drop in seven months, investment grade bonds had their biggest weekly drop since November 2016 whilst gold had its best weekly gain for six weeks.  Meanwhile high profile new share floatations such as Aston Martin and Funding Circle have been nothing short of disasters, down over 15% and 20% respectively.

Clearly this does not sound good in aggregate.  However none of this should come as any huge surprise.  We have used these pages to talk about the importance of knowing what you invest in and why since the launch of the Dynamic Opportunities Fund.  Of course the way financial markets work is that enthusiasm peaks just when everything is going wrong, which is why we have conversely focused on shares and sectors which are less celebrated.

The key word remains ‘rotation’.  This is normally described as a different type of share or sector leading the shorter-term performance charts and – if we look at the recent trends – there have been key shifts towards names and areas trading at a lower valuation level and often paying high dividend yields.  We would expect this to continue and have been positioning the Dynamic Opportunities Fund appropriately.  Recent trading reflects this with further additions to consumer staples General Mills and Philip Morris International both of which pay substantial dividends as well as the out-of-favour UK DIY retailer Kingfisher.  Additionally we have exited our position in the industrial gases company Air Liquide at a good profit.

An important catalyst will – as always – be the upcoming quarterly corporate earnings cycle which later this week starts in earnest with the publication of numbers from a number of important and large US banks.  Key insights this quarter will be focused on issues surrounding the current bout of world trade angst and issues around the impact of higher bond yields and inflation fear.  Both remain very important macroeconomic issues with the potential to substantially impact companies and financial markets around the world.  Whilst many more headlines are dedicated to the former, we believe the latter noted factors may well be more important.  The best ways an individual company can counter the negative pincer movement of higher interest rates and higher cost inflationary pressures is via a prudent balance sheet, strong cash flow generation and a capability to exhibit pricing power.  These have always been very important considerations in our investment methodology and will continue to be so.

In short, the above is why excitable times do not worry us.  Excitable times imply a need for detail and knowledge in what you are investing in and why.  One day this may draw us back towards the (until recently) high flying technology names or the latest UK market big cap IPO.  If this is so, then it will be from a focus of what they are and will be doing and not based on some grandiose hope quotient.

Sometimes it is good not to be trendy!