2018 mid-year resolutions review

Bulgari Hotel, Knightsbridge

Seeing into the future?
Moz Afzal, EFG’s Chief Investment Officer, looked at the current scorecard for EFG’s 2018 Resolutions, with seven out of ten predictions so far correct. We had a non-consensus view that global growth would mature, with the majority of economies showing some signs of a slow-down.

The prediction of monetary policy divergence also proved correct; the European Central Bank looks unlikely to raise interest rates until 2020 and any rise from the Bank of Japan seems a while off. Meanwhile the Federal Reserve has been aggressively hiking rates, with a consensus for this to be continuous, although Moz makes a key call that the Fed will cut back on the pace of hikes in 2019.

The effects of the Trump administration’s tax reform plan have now washed through markets, but at the time of deciding upon our Resolutions there was uncertainty around whether this would actually be implemented.

In terms of China cleaning up, the air quality has improved, something Moz personally vouched for, and there has been a crackdown on tackling corruption.

Since writing the prediction that Bitcoin would blow up, it has dropped by around 75%.

Looking for opportunities in the consumer discretionary sector has proved fruitful; year-to-date it has been the second best performing US sector.

The yen is currently flat, but Moz is keeping his fingers crossed that it will show signs of weakness in the last quarter.

Lithium, nickel and cobalt will benefit from the increased growth of electric vehicles however prices have been dampened by the threat of a trade war.

Finally whilst desirable, inevitably we have not seen a fifteen hour week but productivity disruption has continued.

Economic outlook
In terms of the macro picture, global growth remains robust in absolute terms but it now seems to be levelling off in much of the developed world. With such sustained growth, there are many commentators who are quick to say that there is an impending downturn, but with inflation expectations muted the earliest Moz sees a recession is 2021, or the end of 2020 if the Fed continues aggressively raising rates. Our forward looking inflation models are turning lower, with inflation not expected to pose a problem to developed economies.

With just six months to go before Brexit, we are still none the wiser on what the post-Brexit deal will look like. The tail risks of either a Hard Brexit or Remain now have higher probabilities, and any claims that people know the outcome should be taken with a pinch of salt. The good news is that the FTSE 100 is starting to appear cheap, with a large number of equity valuations more reasonable than what they were at the beginning of the year. In terms of performance the standout of 2018 has been US equities, which we have held our overweight view on.

The pillars of visionary management teams
Future Leaders panellist, Professor Nathan Furr, was our second speaker, laying out the key factors of assessing innovative management teams. The first factor is innovation behaviour. How much of creativity and idea generation can be attributed to genetics? It turns out that research shows that most of creativity is not genetic but behavioural. Assessing innovation behaviour, leaders demonstrated five key behaviours;

• Questioning

• Networking

• Observing

• Associating

• Experimenting

Innovation capability is the second pillar of visionary management teams; the ability to generate ideas and the business capability to react to ideas.

Turning ideas into reality
The third factor is innovation capital, which is the focus of Nathan’s upcoming book. Innovation capital is how innovators win support to turn their ideas into reality. By researching and creating the Forbes lists of the world’s most innovative companies and leaders as well as case studies with everyday innovators, Nathan and his colleagues found that besides great ideas, the innovation process and innovation culture, there was something in addition to these things which was critical to winning support for ideas.

Innovation capital
It was an interview with Marc Benioff, founder of Salesforce.com that alerted Nathan to the importance of innovation capital. Innovation capital is intangible but can be built, earned, used and lost. Four inputs were highlighted that contribute to how innovation capital can be accrued.

One of the most interesting core behaviours of human capital exhibited is being forward thinking. In the case of Microsoft CEO, Satya Nadella, he engaged in ‘mental time travel’ and joined the server business which at the time was unpopular, but he distinguished himself in that field by spotting its future importance. Fast forward and the cloud business is now critical to Microsoft and has given Nadella the platform to now lead the company.

Social capital is about developing both strong and weak ties to innovators, entrepreneurs, leaders and investors, with weak ties actually proving to be important. Giving an example of Facebook, Mark Zuckerberg started Facebook with close ties, but the idea, funding and even the legal agreements came from weak ties.

A simple step to raise reputation capital is to become a founder, but that doesn’t mean you have to start your own company, just take a look at Andy Jassy who started as an Amazon employee helping extend Jeff Bezos’ capabilities. In a meeting, Amazon’s operating systems were identified as a core capability, so Andy raised his hand to join that team. Today he is CEO of Amazon Web Services. The fourth category is impression amplifiers – things you do that amplify either the value of your idea or your own value. Some visible actions as amplifiers include broadcasting, signalling, anchoring and pressuring.

Final thoughts
Looking back, 2018 is not set to become a vintage year for equity or fixed income markets. For fixed income investment grade bonds are still favoured, and while we are less positive on sovereign bonds, we anticipate a more neutral Fed in 2019. Moz still sees pockets of opportunity, remaining overweight towards equities and favouring the US and Japan. Caution is expressed on emerging markets, although prolonged contagion effects are less likely. We look forward to using Nathan’s stimulating insights on innovation capital to strengthen our equity selection research process.


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