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Dolfin’s Head of Investment Management shortlisted in Future Leaders Awards 2019

Simon Black has been shortlisted for both ‘Investment/Portfolio Director of the Year’ and ‘Financial Advisory/UHNW Services Individual of the Year’ in Citywealth Magazine’s annual celebration of excellence in the private wealth sector.

Q1 2019 market views

Richard Gray, Head of Investment Management, believes that “now is the time to mend nets”. Download this quarter’s market views document and watch Richard provide his thoughts on some of 2019’s big themes for investors.

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10 January 2019 / Quarterly investment outlooks
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As a rule, I avoid publishing forecasts, simply because I believe it to be an exercise in futility, if not intellectual dishonesty. Instead, I believe it is vitally important to try to understand potential risks (both to the upside and to the downside) and attempt to invest accordingly.

I use the word risk deliberately, because markets do a reasonably good job of measuring, discounting and pricing risk. Markets, however, seem to be very poor at gauging uncertainty.

Entrepreneurs dwell in the realm of the unknown and markets are unable to price that underlying uncertainty.

Frank Knight, the University of Chicago economist, distinguished between risk and uncertainty as he tried to explain why it was possible for entrepreneurs to amass great wealth. Such a feat, if markets really are efficient and able to erode competitive advantages quickly, ought to be impossible.

In his book Risk, Uncertainty and Profit, Knight explained that risk is a ‘known unknown’, whereas uncertainty is an ‘unknown unknown’. Investors and markets deal with risk, its associated probabilities and the distribution of those probabilities. Entrepreneurs dwell in the realm of the unknown and markets are unable to price that underlying uncertainty.

The US and China relationship is a major geopolitical rivalry that may exist for years.

Currently, the biggest and most important unknown unknown is the relationship between the US and China. This relationship is a major geopolitical rivalry that may exist for years. It will determine, at a global level, fundamentally important factors such as growth rates, interest rates, FX rates, business confidence, consumer sentiment, capital expenditure, consumption and military spending.

Some will tell you that there is an ‘X’ per cent probability of the US backing down due to certain economic or political factors. Some will tell you that there is a ‘Y’ per cent probability of China backing down because of another set of economic or political factors. I believe that such people are mistaken, because there is no way of knowing the outcome of the US–China trade spat. The result is simply unknowable: it is governed by uncertainty not by risk.
Why uncertainty? The outcome of the US–China trade confrontation will be determined by whoever blinks first. It is not that the odds of the situation are unknown, it is that they are unknowable. Only Trump and Xi have a chance of knowing – and they cannot know what the other person is thinking.

I believe that now is one of those times to mend nets, rather than going out in the boat.

I do not believe that it makes sense to take significant investment stances when market circumstances include such significant levels of uncertainty. Portfolios should therefore include higher levels of both cash and lower-risk assets than normal, until the future shape of trade relations between the US and China is known (or at least knowable).

Fishermen say that there is a time to fish and a time to stay at home repairing nets. I believe that now is one of those times to mend nets, rather than going out in the boat.

One might miss some upside, for sure, but equally one might also miss the next big leg down. With higher cash levels, one can certainly be opportunistic as and when the mist starts to clear.

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