A short history of Italian government debt Italy’s titanic national debt, similarly to Rome, was not built in a day. In Italy, like much of Europe, the saga begins benignly in the ashes of World War II. The economic miracles experienced by states such as Greece, Germany and Japan in the 1950s-60s as the countries rebuilt their economies from the ground up (with aid from the US Marshall plan) resulted in two decades of breakneck economic growth. In Italy this period was known as ‘il miracolo economico’. GDP growth averaged just below 6% until 1963 and 5% thereafter until 1973. This boom eventually gave way to fiscal largesse in an attempt to continue the dramatic growth rates and associated quality of life improvements the domestic population had grown accustomed to. With the puncturing of ‘il miracolo’ during the 1973 global oil crisis, subsequent Italian governments borrowed their way to increased prosperity. From the Years of Lead in the 1970s to Rampartism in the 80s and the Second Republic of 1992, Italian debt steadily rose from 30% of GDP, along with real living standards. Italy Debt to GDP ratio 1900-2018. Source: Bloomberg By the early 90s where our overview begins, Italian [...]
In his autobiography, “The Way the Wind Blows”, former prime minister Alec Douglas-Home recounted bucolic childhood memories of Scottish summer holidays with each day’s activities determined by the direction of the wind. That wind is increasingly viewed as part of the solution to society’s need for a sustainable source of electricity. Critics of wind power were understandably numerous, when faced with the prospect of the spread of futuristic turbines across wild places. Perhaps, like Home might, they fear for the plight of game birds and the visual pollution that on-shore wind farms bring. Technical and operational hurdles for on-shore wind farms include the unreliability of on-shore wind speeds and wind shadow – the phenomenon of wind strength depletion downstream of a turbine. There is also the question of availability of suitable sites. Like raindrops on sun-bleached rock, these concerns evaporate when wind turbines are placed off-shore. Off-shore wind is more reliable, which means more consistent energy generation and average wind-speeds are higher which permits the use of bigger turbines and therefore greater energy generation capacity. The UK is at the front of the pack of nations building off-shore wind infrastructure. In 2017, the UK generated 15% of its electricity requirement [...]
Newly approved Pacific & Emerging strategy stock: China Literature operates China’s largest online reading platforms, comprising 48% of the total online & mobile reading market with 191mn monthly users. The company hosts a proprietary library of 10.1 million literary works spanning 200 genres, generated by its 6.9 million writers online, for consumption online. Bypassing the traditional publisher model, popular titles are monetised through paid subscriptions and, increasingly, through licensed adaptations into other media formats including film & TV, web series, animations, games, and audio & physical books. Leveraging its scale, treasure trove of intellectual property and distribution capability, the company has entrenched itself at the centre of China’s literary ecosystem, connecting writers, readers and adaptation partners. China’s online literature market is expected to grow at +31% CAGR to 2020, having achieved a +45% p.a. growth between 2013-16. The wider Chinese entertainment market is also seeing robust growth (+14% CAGR to 2020). The domestic Chinese box office is set to overtake the US this year, giving rise to strong demand for high quality content.
Newly approved Global Leaders stock: Chr. Hansen is a leading global bioscience company engaged in the development of natural ingredient solutions for the food, nutritional, pharmaceutical and agricultural industries. The group’s products leverage its core competence in microbial strains, or ‘good bacteria’, enzymes and natural colours. 60% of group sales are derived from microbial cultures (the majority of which are starter cultures for cheese and fermented milk), 20% from human and animal probiotics, and 20% from natural colourings for the food and beverage industry. The group is uniquely positioned at the convergence of multiple consumer trends: the desire for natural ingredients, the removal of antibiotics and chemical preservatives in the food chain, health and wellness and the huge potential of the human microbiome. Over the past 10 years the group has delivered an admirable combination of expanding margins and organic growth of 10% p.a. Concurrently return on capital has expanded from 4% in 2010 to 16% in 2016/17 driven primarily by improved asset turnover.
Our view on gold has changed recently and we have sold the positions in full across all portfolios. Gold has a few things going for it. It has had a prescribed value for thousands of years – stemming directly from the fact that it was, for much of the past three millennia, a medium of exchange, a savings product - in effect a currency. In 1971, when the US finally came off the gold standard, the direct link between paper currencies and gold was lost. Forty years is a relatively short time in a period measured in centuries, so institutional and personal memories of the linkage remain strong. However, Gold is an example of a putatively safe asset which is, on investigation, not reliable in all environments. Gold is not necessarily a beneficiary from higher inflation, as is commonly thought. The price of gold demonstrates no stable statistical relationship with the measured rate of inflation. No matter whose CPI series one adopts, the relationship is unstable by virtue of the very large swings in the gold price. The case for believing that gold offers a very long run store of value is not well constructed. In face of these inconvenient [...]
The Investment Team compiles questions and answers, asked at our Global Leaders Breakfasts on Wednesday 25th & Thursday 26th April 2018. Most of the information is public, what do you see in your stocks that others don’t? It is less a matter of seeking information advantage in the here and now but structuring our thoughts over sufficient long-time horizons where competition is scarcer. The arbitrage is largely in holding great companies for the long term and avoiding the usual pratfalls which are over-leverage and disruption. Does the hard rebalance contradict the proposition to hold stock in the long-term as you cut the winners? Rebalancing is consistent with our expectation of each company making a meaningful contribution to return and our time horizon given lower confidence in short term share price outcomes versus longer term fundamental performance. We expect rebalancing to equal weights will add value as it is the natural response of a long-term shareholder to the impact of stock market preferences on share prices. Cutting positions to maintain equal weighting is an important risk control given it minimises the portfolio of major industry disruption to any one position. Our approach effectively deals with the situation of holding an outsized [...]
We were delighted that the two Getty Interns we have been supporting, Naomi Baker and Linnea Rheborg, were part of the Getty team in PyeongChang, South Korea, shooting the 2018 Winter Paralympics. Here, they share their experiences on some of their favourite shoots with some behind-the-scenes highlights. Naomi Baker Once I arrived in a snow covered PyeongChang, it was time to head out and explore some of the venues, including Alpine and Cross-country. From being at the Olympics and being shown around the Cross-country venue by Chief Photographer Matthias Hangst I knew how important it was to be prepared for when the competition begins. The alpine was the hardest venue for me. Physically is was very tough, cold and icy which made it challenging to get around and for me one of the hardest photographic situations I have ever been in. Once the competition starts and you see the images you are producing, it is very rewarding. During my time photographing the Paralympics I really had to think about backgrounds, time of day, the competition course layout, giving myself enough time to get to my position, and also the lenses I would need to do the best job. Having recently [...]
The first inflation linked bond (or linker) was launched in 1780 by the Massachusetts Bay Company. Although inflation was a much less understood or easily measured concept back then, the need for inflation protection has been acutely felt since the inception of financial markets. Inflation linked bonds (ILBs) only came into investor consciousness properly however post their introduction in the 1980s by the UK DMO and in 1997 by the US Treasury. This resulted in the most liquid inflation linked bond market of today the US$500bn (notional) US TIPs market. TIPs stand for Treasury Inflation Protected Securities. To contextualise the issues of ILBs we must appreciate that their pricing dynamics are essentially the same as nominal bonds. That is to say, the market determined price of a nominal bond is the collection of its cash flows (fixed coupon x principal) and principal repayment, all discounted to the present value via relevant discount rates. Following from this, the sole differentiating technical factor between nominal and ILBs is that the inflation linked bond receives an adjustment to coupons and principal value (paid at maturity) based on an inflation tracking index (typically CPI). Because of this, ILBs (to some degree) suffer or benefit [...]
We are delighted to be supporting a new theatre: The Barn Theatre in the Cotswolds. Driven by a deep passion for theatre, Ian Carling and his wife Chrissie have created a bold theatrical legacy for Cirencester. A former 1940s Nissen hut has been transformed into a beautiful, state-of-the-art, air-conditioned auditorium for 200 theatre-lovers. With a studio rehearsal suite, dressing rooms, a green room, and an orchestra pit, audiences will experience entertainment that competes with the West End. The first performance produced by the theatre will be The Secret Garden, a new family musical based on the 1911 novel by Frances Hodgson Burnett. The musical will tell the powerful and inspiring story about how one small girl can turn everything around when she decides she ‘wants things to grow’. In support of the first performance, Dan Buckley of Thumbcrumble Design produced the following notice of their inaugural performance, which will appear in the programme. We are thrilled to be working with The Barn Theatre this year, and we look forward to supporting their future performances. The Barn Theatre Project is a registered charity. https://barntheatre.org.uk/
Cobras in the Basket: Bonds, their curves, their relationship with equities and market tops In the last two months, we have seen a meaningful rise in bond yields. Key maturities in the US curve have crept up. The 2Y US Treasuries now stand at 2.15%, the 5s (5 years maturity) have moved up to 2.53% and the 10s to 2.73%. This has not been accompanied by any visible change in central bank policy or rhetoric. It is our belief that investors should take heed and begin to adjust their portfolios, if they have not already done so. This is not the first time in the post crisis period (a period that will soon be 10 years long) that bond yields have fluttered. During the so called “taper tantrum” that occurred between February 2013 and January 2014, those same maturities ran up considerably: 5s went from 0.63% to 1.86% and 10s 1.62% to 2.80%. There were other noticeable sell offs after the post 2008 low. The 10s moved from 2.0% points in early 2009 only to crest at 4.0% in 2010. As we can see, in those previous periods, yields then proceeded down, with the curve compressing to new lows. [...]