“The Doomsday Clock, that renowned indicator of the impending threat of “nuclear Armageddon and the end of humanity”, first published by the Bulletin of the Atomic Scientists in 1947, is currently showing it is two minutes to midnight.
The last time the clock hands sat at this time was in 1953 when the US military developed the hydrogen bomb.
Having evolved over the years to include wider threats to society, such as climate change, bioweapons, cybersecurity and the “cavalier and reckless language” used by Donald Trump, the clock is a widely accepted measure of the state of risk around the world and since the US withdrew from the Paris Agreement on climate change, that threat seems to have risen higher.
So, with such impending “doom”, how does a global fund manager – especially one focused on income – hold his nerve?
Nick Clay, head of the Newton Global Income strategy, is well practised at shutting out the noise, thanks, in part, to his process.
“What surprises me sometimes is that the markets don’t seem to care about Trump and everyone around him. They’ve given him a Teflon-like quality where none of the mud will ever stick. As such, I think the idea of imminent Armageddon is something of a red herring.”
Positive signs abound
He points to the fact that US markets continue to be in the black despite falls through the end of 2018, and Clay says much of the evidence supports the fact many investors remain certain of particular outcomes.
“They still believe rates will go up (albeit less rapidly), are certain the economy is humming along nicely, certain that company earnings will continue to come through.”
Perhaps a red herring is the case; the Doomsday Clock, Trump, trade wars, climate change and ensuing volatility create worrying newsflow, yet Clay says against this background noise, he remains unfazed, grateful to a strategy that encourages him to think in a contrarian fashion.
“It prevents us running with the herd; not always a fun place to be, because human instinct is to seek the comfort of the crowd,” he says.
So rather than being concerned with the Doomsday naysayers, he says if markets feel complacent about levels of risk then that is probably a time to focus on companies likely to survive over the longer term.
“2018 was a more volatile ride, compared with 2017,” he adds.
Beware the downward journey
Clay draws an analogy with mountaineering, saying most people die on the way down a mountain due to expending all their efforts and resources focused on the way up.
“It’s the same in investing. It is much more important that you miss the worst 10 days than gain the 10 best days. So you need to invest that way. You need to be investing for the Fed to continue its tightening cycle, for China slowing down, for Europe’s disappointing economic data and the ongoing uncertainty around a trade war. These are all risks to markets and to economic growth and therefore to US corporate profit growth.”
What he does believe is changing, from an income perspective, particularly as the last few quarters have factored in the US tax cuts, that are not repeatable events. This results in re-prioritising the need to focus on fundamentals, namely strong balance sheets and stable earnings profiles.
“I think people are already starting to shift from a focus on companies with strong dividend growth as a sign of a healthy company and starting to focus more on the attribute of a company having a good and sustainable starting yield.
“Having a solid absolute yield is more important and a lot of the financial ’tricks’ – such as the tax breaks or refinancing balance sheets – have been used up. We have to go back to strong fundamentals and that is a lot harder to come by.
“In markets that are more volatile, having a sustainable starting yield of 4% is preferable than 2% with a 20% growth prospect.””
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