Carrington Investment Approach

We know that the recent sharp moves down in some markets will be making people nervous and we want to share with you some of Eric’s thoughts on the background to the recent moves and also how he is thinking it may play out in the slightly longer term. Although, the markets largely ignored these negatives until 3 weeks ago, they have now reacted very rapidly.

The key negatives are :-

  • Eurozone growth is rapidly weakening and although it’s been a bit quiet on the Ukraine front, it has not yet gone away.
  • Interest rates will at some point start to rise again making borrowing more expensive. Combined with this the extremes of monetary policy, which have been extremely accommodating, may tighten somewhat.
  • Growth in the world economy is slowing again and is very patchy.
  • On the geo-political front, the Middle East remains very unstable.
  • Ebola is a growing threat.

Are there any positives? Well yes, however they are having no impact short term.

I see those as:-

  • The Euro is weakening against all currencies, which will make it easier for Eurozone companies in the export sector.
  • Chinese growth recently exceeded expectations.
  • The Fed eased expectations of imminent interest rate increases.
  • GDP numbers from both the USA and UK are now recovering strongly.
  • Unemployment is falling, pointing to more activity in the economy.
  • Oil prices are low. This will feed through into lower inflation in both fuel prices and the cost of transport of goods.

Although we have not yet made that many changes at the portfolio level, we would like to reassure you that during the summer we have been conducting a large number of meetings with the investment management community. We have seen some excellent fund managers, who we expect to bring into the portfolios, largely to reduce some of the volatility and also to help replace some of our existing fixed interest investments.

To give you a brief overview of some of the technical positions I have attach a chart of the S&P 500 below, the main USA index.

S&P 500 Graph_161014

Whilst there is no guarantee that markets will respond the same way, we still think the odds favour it. The indicator at the bottom of the chart shows oversold conditions when it is below zero. It is now at an extreme and when it gives similar readings share prices tend to rise and recover the losses quite quickly (within a period of a few months).

Rapid and quite large drops occurred at the end of June 2013 and February 2014. Sentiment weakened dramatically at these times and yet it would have been wrong to exit markets at these times as the price moves that followed were just as rapid, but to the upside.

We spend a lot of time studying markets and their moves and would try to offer some comfort that however this finally plays out we will be watching it very closely and will make changes as needed to respond to the changes in markets.

If you have any concerns or questions regarding the current situation and our update above, please do not hesitate to contact us.

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