DLS Capital Management August 2017

AUGUST

2017 WORLD ECONOMIC AND MARKET OUTLOOK JULY 2017

Graham O Neill

BUSINESS BRIEFS TIPS TO PREVENT MOBILE PHONE CHARGES ROAMING OUT OF CONTROL MEET THE TEAM RANGE OF SERVICES

TABLE OF CONTENTS World Economic And Market Outlook - July 2017 Graham O Neill

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Business Briefs

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Tips To Prevent Mobile Phone Charges Roaming Out Of Control

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Meet The Team

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Range of Services

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Welcome to the August 2017 edition of our bi-monthly newsletter.

We hope you are having an enjoyable summer and have managed to get a break away and enjoy some much needed relaxation.

This issue, as always contains articles on a variety of different topics which we hope will be of interest to you and your business. We would like to draw your attention, in particular, to the first article, prepared by Graham O’Neill.

Our highly experienced team here at DLS Capital Management are happy to assist you, so please do not hesitate to get in touch with any queries you may have.

Dervilla and Sarah.

July

2017

WORLD ECONOMIC & MARKET OUTLOOK Graham O’Neill - DIRECTOR AT INDEPENDENT RESEARCH CONSULTANCY LIMITED

Long Bull Market In these circumstances many investors have migrated towards risk assets due to the higher yield or potential returns available. Whether this is an appropriate amount of risk depends on analysing both the downside for a portfolio and the time horizon for the investor. Being a forced seller of illiquid or volatile assets is never a sensible investment strategy. What investors can do is try to understand what can go wrong in a portfolio. For individuals buying insurance for a portfolio in the form of put options is tricky, and even for investment professionals can be an expensive course of action if markets do not fall. Investors could also easily buy insurance in the wrong market with, for example, some fixed interest managers holding corporate credit, taking protection against Brexit a year ago by holding put options on equity markets which actually rose in value.

After a long bull market which started in 2009 post the Financial Crisis, it is natural for investors to worry about what can go wrong in markets, and especially their portfolio. For investors sitting on significant gains protecting a portfolio is clearly a good idea and history shows that for longer term investment periods, such as the life of an individual pension fund, from time to time there will be serious setbacks in equity markets.

Mitigating Risk

A more sensible course for investors might be to review the assets held and structure the portfolio in a way that mitigates what are considered to be the most likely risks. This may involve holding alternative strategies with a low correlation to equity markets and interest rates which, if the base case works out, will only mark time, but can provide upside in the case of a market shock. Another alternative strategy is to look in terms of actual equity exposure and guard against an economic downturn through limiting cyclicality, or a significant rise in interest rates through not holding highly leveraged companies. Investors could also look at short dated inflation linked bonds or floating rate notes as a hedge against the possibility of rising inflation.

The traditional way to protect against this would be holdings in government bonds which have shown in most circumstances, the ability to rise in value when equity markets head south. In previous cycles bond yields have ticked up during an economic recovery, so although short term returns might not have looked exciting, the coupon on core fixed interest assets paid investors to wait for better opportunities in equity markets.

Today’s world for investors is much more problematic with the low yields available in core government bond markets making this an unattractive asset class for most investors, a comment which also applies to cash.

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Disruption

on a portfolio for income each year will have a lot lower capacity for risk, or in other words a higher level of intolerance to a market drawdown. For some market volatility is impossible to take and for these investors risk appetite is low, which can result in leaving potential returns on the table. These investors have seen the investment climate for their preferred portfolio options worsen at a time of low interest rates and financial repression. Risk appetite is important as investors choosing a portfolio with a higher risk appetite than they can tolerate could end up selling out of markets at low points which occurred in early 2009 to some investors. Whilst investors naturally focus on the risk of depression, the risk of unanticipated inflation whilst not a problem over the past 25 years, could come back to hit markets. Other less easily quantifiable risks occur today in a world of disruption.

Today’s world is also complicated through what has been referred to as disruption. This includes market valuations disrupted by extra ordinary central bank policies of ZIRP, QE and in some cases negative interest rates. The corporate world, as can be seen with Amazon and the effect on the supermarket sector globally of its recent acquisition of Whole Foods in the States, together with the technological impact of shale on global oil supply and demand. A third more recent factor is disruptive politics which came into focus with the Brexit vote and was reinforced with the election of Trump and the recent UK General Election. Today’s market valuations, together with economic and political environment are not something even experienced fund managers have had to contend with.

In this environment there are a number of potential economic or political events that could upset markets. A reasonable question then is whether investors can hope to meaningfully guard against these through portfolio construction.

Another way of thinking about risk involves looking at valuation.

It can be argued quite reasonably valuation is the best form of risk control. Thus investors in general are better off looking for large safety margins, a concept value investors have exploited over many years.

Risk & Return

Mean Reversion

At some stage all investors recognise that the business of investing is inherently about taking risk, as without this a meaningful return, especially in today’s world, is impossible.

Some risks can and should be guarded against. Leverage was an underestimated risk in the noughties until the Financial Crisis when the forced removal of this led to severe losses for some investors, especially those holding less liquid asset classes.

Historically the reason why equities give a higher return than government bonds is that investors require a risk premium to hold them. However, if it was the case that equities always produced a higher return than government bonds they would not be riskier. This statement is also true for credit, real estate and other risk assets. Historically investors have demanded a higher return from long dated fixed interest assets to guard against the risk of inflation.

Mean reversion investment processes worked well until the financial crisis, but results have now been more mixed. A world of mean reversion where companies having profitability issues would eventually see a recovery in margins suited value managers. For the last 20 years, however, PE ratios have stayed high looking at the previous 60 years. Analysis by Jeremy Grantham at GMO has shown that in recent times (last 20 years) PE ratios in the States have varied around a higher mean. Even when markets have had severe setbacks such as after the TMT bubble burst, and during the Financial Crisis, the market has struggled to go significantly below previous longterm trend valuation levels, or remain there for long. For the 60 years prior to 1996 average PE ratios were 13.95x in the States versus 23.3x for the next 20 years. Even in 2009 the market went below its old trend PE of 13.95x for only around six months. This suggests the possibility that the Shiller equilibrium PE looking at trend earnings has actually moved higher. One factor justifying higher valuation levels has been the stability and strength of corporate profit margins, especially in the States which have risen by about 30% compared to the pre 1997 era. Another factor is that low interest rates support high valuation levels as a lower discount rate boosts valuation levels. Whilst low interest rates had been supported by central bank policy so-called normalisation is unlikely to take rates to old historic levels. It is likely that there will continue to be a savings glut, especially as demographics in developed markets show an ageing population. Thus some market variables are different today with stronger disinflationary pressures than occurred 20 years ago.

Until the Financial Crisis it was generally accepted that the amount of risk taken would determine the long term return investors can expect. Whilst this is true in general, it does not necessarily mean that investors with a very long term horizon should always take high levels of risk in portfolios, as the valuation of an asset at the point of entry has over longer time periods such as a decade been the primary driver of return.

Taking high risk at the wrong price can lead to disaster, even for very long term portfolios. Volatility in risk assets means most investors cannot maintain a leveraged position through a significant downturn and end up as a forced seller of an asset at a distressed price. One of the interesting features of the post GFC recovery has been that what have been considered lower risk assets such as government bonds and less volatile equities have delivered the highest returns. It is unusual for less cyclical names to be at the top of the leader board in a long running bull market such as has occurred in the United States.

Corporate profit share when looked at versus GDP remains at historically elevated levels as companies have held on to higher margins than longer term history would suggest was likely.

Investors need to question whether these higher margins are permanent. Many investment strategies rely on profit margins reverting to mean. Whilst margins remain at elevated levels a return to old historic valuation levels seems unlikely.

Investors need to consider both risk capacity and risk appetite.

The former is the loss that can be endured without having to significantly change spending plans or lifestyle. This clearly varies for different investors and older investors or those relying

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In an era of low real interest rates, which are unlikely to increase sharply, high margin companies with brands may well continue to command higher multiples than old school value investors would expect. In the US corporate margins are likely to receive some small boost at least from a Trump tax package which in today’s world is unlikely to be fully passed through to consumers. The relatively small levels of de-regulation which are likely to occur, will at the margin lower corporate costs and thus be profit accretive.

The type of stocks that have performed best in the post GFC period are those with pricing power typically with brands. It is likely increased globalisation has resulted in higher values for brands and the US has not only a number of well established old multinational companies, but also new ones in the Technology sector. Apple, Amazon, Facebook and Alphabet (Google) clearly have brand awareness amongst consumers today and brand value in the eye of investors. This is also true in Asian markets where Tencent, Baidu and Alibaba clearly have brand value of significance. In today’s world there certainly no longer seems to be what economists refer to as ‘perfect competition’ and investors assuming that high margins would be rapidly competed away in a free market have been proved wrong.

Globalisation has undoubtedly reduced the bargaining power of labour, another positive for margins globally. Real interest rates are also much lower than 20 years ago allowing many corporates to operate with higher leverage after extensive share buyback programmes. In a period of economic upswing this has allowed margins to expand. Without significant reversal in today’s economic conditions the likelihood remains that corporates will continue to enjoy higher than historic levels of margin in a world where growth remains sluggish and real rates low.

The post crisis economic recovery has been described by some investors as a period of ‘secular stagnation.’ In the fourth quarter of 2016 many investors expected this to be challenged by the Trump reflation trade. However, the practicalities of office in which significant economic policies/changes have to be passed through Congress always made this harder than rhetoric would have suggested, as can be seen by the performance of both government bonds and sector leadership in equity markets to date in 2017. Markets are trading at historically high valuation levels, but over the last 20 years the bargain basement PE levels of previous eras have failed to reappear, even after bubbles burst, both in TMT in the early part of the noughties and later in the decade when the credit bubble deflated sharply leading to the Financial Crisis. With the base case economic scenario for the continuation of a sluggish but extended cycle with continued Central Bank support for markets, a sharp setback may be further away than equity market bears expect.

A world with a glut of savings and historically low real interest rates will continue to support quality brand owning companies, suggesting deep value investors will need to exercise patience and hope they can remain solvent at a time when markets seem to be pricing certain assets in an irrational manner.

So far the election of Donald Trump has done little to alter the period of sluggish but positive economic growth in the post crisis recovery. Moves this year in the US yield curve, which has flattened significantly, suggest bond markets have no fear of the Trump reflation trade proving successful. Central banks themselves have been prepared to use low real interest rates to either stimulate or support asset prices and this policy is unlikely to change significantly in the near term. For those thinking Donald Trump might alter this equation, it should be remembered that he is at his core a real estate developer who is asset rich and also holds significant amounts of debt. A mix unlikely to argue for higher real interest rates.

One point of caution is that as and when a downturn does occur globally leverage is at higher levels than pre the Financial Crisis, although the make up is different by sector and region. This in combination with high valuations is an uncomfortable mix.

Whilst globally interest rates remain low this position can be sustained, via lower discount rates and low debt servicing costs.

Pimco have described this as a secure but unstable position.

Mitigating Risk A world with a glut of savings and historically low real interest rates will continue to support quality brand owning companies, suggesting deep value investors will need to exercise patience and hope they can remain solvent at a time when markets seem to be pricing certain assets in an irrational manner.

One point of caution is that as and when a downturn does occur globally leverage is at higher levels than pre the Financial Crisis, although the make up is different by sector and region. This in combination with high valuations is an uncomfortable mix.

Whilst globally interest rates remain low this position can be sustained, via lower discount rates and low debt servicing costs.

Pimco have described this as a secure but unstable position.

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The UK has now moved into the negotiations phase and here the Leave campaigners had oversimplified the task ahead.

The UK is undoubtedly in a less strong position than ‘Leavers’ had argued and a trade off will have to occur between control over borders and immigration and free access to Europe’s markets. EU leaders will feel they are negotiating with a lame duck Prime Minister who has a mandate for nothing, which will further complicate hopes for rapid progress. The more control the UK wants over domestic issues the less access there will be to European markets. Restricting immigration to the UK will only worsen the public finances in the short term.

Britain also at an early stage has to resolve the amount of money owed to the EU budget, and without agreement here progress on trade talks will be stilted.

BREXIT ONE YEAR ON

For UK businesses protectionist moves will raise costs and whilst there were promises of a cut to red tape exporters are likely to suffer from duplicate processes. There will also be considerable uncertainty until this is all resolved, as can be seen in the fund management industry where the issue of passporting is felt to have a low priority on government agendas. Some UK firms will decide to relocate part of their operations rather than take the risk of crashing out of market access in Europe in two year’s time. Even though there had been hope of liberalising trading ties with non EU markets the complications of this should not be underestimated as current arrangements have been negotiated with the US, India, China and Canada within the EU umbrella.

With just over a year having passed since the EU Referendum, to the surprise of some, the UK economy has continued to grow, although the rate of expansion has slowed of late. The three quarters after the poll has shown an annualised rate of GDP growth of 1.8%, whilst unemployment has fallen from 4.9% to 4.6%. The headline numbers are less encouraging than they first seem as household consumption accounted for more than four fifths of the economy’s expansion. Perhaps this is not as surprising as it first seems, as the majority of those who voted were in favour of Brexit and therefore got what they wanted, something unlikely to dent consumer confidence in the short term. Business investment made no contribution, whilst net exports detracted.

The end result of all of this is that the Bank of England has cut its medium term growth assessments to below 2% to around the 1.75% level. The most recent data such as UK PMI’s show signs of weakening. The bank believes that UK living standards over the medium term will be worse because of Brexit. Whilst the economy appeared to be holding up well in the immediate aftermath of the vote, this was partly due to the sugar rush of a currency devaluation, which is never a long term panacea to an economy’s ills. Whilst the cost of a fall in Sterling over the last 12 months have been masked, partly by many large businesses having currency hedging in place, this will not be the case over the 12 months going forward. The recent MPC Minutes demonstrated some policy makers are concerned about the inflationary impact of a lower currency and it is not that long ago that currency weakness forced UK interest rates higher, even though economic growth was under pressure.

The most recent data shows prices rising at an annual rate of around 2.9%, but regular wages increasing only by 1.7%.

As a result a year after the referendum most households will be worse off. The UK savings rate has already fallen to its lowest level in over 50 years. Strong consumption is unlikely to be sustained if accompanied by falling incomes. Economic forecasters on both sides misjudged the impact of the Brexit outcome. The UK Treasury had forecast a shallow recession based on consumer belt tightening, underestimating that for Brexit to occur a majority of people had to be happy with the result. For these people a Brexit vote did not increase uncertainty. On the Leave side economists had been sanguine about the effect on Sterling of a leave vote, whereas international investors have let the currency take the strain as they believe Brexit will damage the UK. In the recent General Election the voting public has once again taken a nonestablishment line, which has punished the Conservative Party who wrongly concluded a Brexit vote was a vote in favour of their policies. The fall in Sterling will continue the squeeze on living standards for the majority of the UK population and is likely to impact for a number of years.

Today there are few signs of an investment led response to Brexit and this should not really be surprising whilst uncertainty over market access remains, especially in a world where supply chains typically move through a number of continents. The best hope for the UK economy is that with no parliamentary majority in favour of a hard Brexit, an interim arrangement can be put in place which will end uncertainty and allow a long transition period. The most negative outcome would be if political uncertainty results in a government with a mandate for nothing which then allows the UK to crash out of Europe without any agreement. Prime Minister Teresa May has made a number of unfortunate predictions in recent months, and it is likely that her belief that no deal is better than a bad deal would fall into that category if allowed to pass.

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For the Fed core inflation has remained resolutely below target and now hopes for a speedy Republican fiscal stimulus have receded. The latest jobs figures released in early June for the month of May showed hiring undershooting expectations and growth in average hourly earnings is still no stronger than it was three years earlier at around 2.4%. Core inflation has fallen back to just 1.5% in April. A subdued inflation picture has resulted in diverse views in the media from different Fed members. James Bullard, the St. Louis Fed President, has questioned the so-called Phillips Curve that links unemployment to price growth. He does not believe inflation is heating up.

US ECONOMY

One factor behind this more complex recovery has been the uneven upswing in the US jobs market. The Mid West, the traditional industrial heartland, has seen much slower median wage growth from 2000 to 2016 than the north east of the country. Many rural and poor urban regions have entrenched unemployment and college graduates have fared much better than lesser educated members of their peer group or cohort. In run down areas many candidates have criminal records or failed drug tests, which make it hard for them to re-enter the labour force. In contrast, across large parts of the north eastern seaboard job conditions are tight. In the west of the United States the crackdown on immigration has led to labour shortages in some areas.

A top official at the International Monetary Fund, Stephan Danninger, believes that if the US continues to add jobs at the rate of 100,000 a month, a pace well below the 12 month average of 180,000, demand for labour will exceed supply and push wages higher. Construction is a part of the economy seeing higher labour costs. Some economists argue that lack of wage growth signifies there is still spare capacity in the labour force. Others believe that wages always lag an economic upturn and will catch up. Overall in the US unemployment is now around 4.3% below what the Fed believe will be the long term rate of 4.7%. Job openings are at a record high of more than 6m. Some of those who have chosen not to re-enter the labour market may not have the skills to get back in. Another factor behind modest wage growth is the threat, perceived or real, of increased automation on jobs.

Whilst some investors fear the US economy is slowing as job gains have weakened, recent manufacturing PMI data show continued economic strength. Estimates suggest around 80,000 jobs need to be added each month to absorb new labour market entrants, so the labour market continues to tighten. Another cause for some investor caution has been the flattening of the US yield curve, which historically has often been a sign of economic slowdown. However we do not live in normal times. Central bank QE policies have distorted both global bond yields and the shape of the yield curve. There have been bond refugees who at the long end of the curve have purchased US Treasuries and hedged the currency to escape negative bund yields or ultra-low gilt yields. Furthermore some strategic bond funds whilst maintaining overall positive duration have instigated trades that are long of the US Treasury market whilst short of bunds/gilts.

As the US nears full employment wage growth and inflation would be expected to increase leading to a rise in interest rates. To date wage growth in the US economic recovery has remained muted and even today different geographic regions and different industries are seeing hugely varying trends and conditions. Some companies and sectors, ranging from manufacturing and construction to healthcare and agriculture, warn of a lack of qualified employees.

Economies would expect in this scenario, at a time when the unemployment rate is the lowest since the beginning of the century that Americans would be heading into a period of accelerating wage and price growth. Other parts of the States are not as buoyant and last year’s election was dominated by concerns over poor job prospects in traditional Democrat heartlands which resulted in the election of Donald Trump.

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Asia

EUROPEAN ECONOMY

Historically, exposure to Asia allowed investors access to some of the world’s fastest countries, but now individual growth rates vary, although as a whole it remains one of the fastest growing regions.

The Australian economy has slowed post the mining boom, whilst China has rebounded post its 2016 stimulus package. India, despite the shock of de-monetisation, continues to grow at a healthy rate. The introduction of a nationwide GST (goods and sales tax) augurs well for India’s future emphasising the focus of the Modi administration on reform. Much of Asia remains in a catch up phase with the west in terms of economic development, with the potential for productivity improvements. Corporate Governance within the region varies hugely but many companies now have a focus on generating returns for minority shareholders and are allocating capital more efficiently.

The election of Donald Trump as US President initially had a negative effect on Asian markets, but his inability to deliver policy objectives together with a weak US dollar have helped ease monetary conditions within Asia and have helped boost stock markets which are now receiving earnings upgrades. The rate of economic growth in China while slower than in the early years of this decade remain in line with government targets, helping both the Asian region and the wider global economy. Whilst there remains longer-term concerns about the level of debt, particularly corporate and other nongovernment debt that has been built up, China is unlikely to see a systemic banking crisis due to its closed financial system. Domestic consumption continues to be strong, supported by continued wage growth. The Chinese currency, the Renminbi, has also stabilised as authorities have stemmed capital outflows.

India should continue to benefit from its young labour force, a factor also true of the Philippines. Indonesia is another market with long term catch up potential, although currently seeing an economic slowdown. Inflation levels have generally fallen throughout the region due to lower commodity and oil prices and this should benefit many countries in the region that are net oil/energy/commodities importers. We expect the strong domestic consumption story in Asia to continue for many years to come and believe this remains a region with excellent long term potential for investors.

The recovery in Europe has continued to gather pace in Q2 as is demonstrated by the German IFO Index hitting record levels.

Across the Eurozone business are in stronger health judging from the latest survey data compiled by HIS Markit. The recovery has now spread across the region, with for example Spain in the so called periphery, recording the strongest service sector data in two years. Towards the end of the quarter ECB Chief Mario Draghi stated he was confident the European Central Bank’s policies will restore inflationary pressures in the Eurozone and the scars inflicted by the Financial Crisis will fully heal. The ECB President told the bank’s conference in Sintra, Portugal “all the signs now point to a strengthening and broadening recovery in the Euro area”.

He added “deflationary forces have been replaced by reflationary ones”. Although there was some confusion in the market after this speech and sources attributed to the ECB played down Draghi’s comments, it is clear that looking forward it is a question of when rather than if tapering of bond purchases will occur. Investors should remember, however, that even when this occurs and interest rates modestly rise, monetary policy in the Eurozone will remain be stimulative.

Japan The Japanese economy expanded for four consecutive quarters in 2016, and growth has continued in 2017 with GDP expectations exceeded. The majority of the growth has come from exports, although there are signs domestic consumption is benefitting from a tight labour market. The Bank of Japan believes a tighter labour market will eventually allow the country to hit its inflation target. In the meantime monetary policy will remain accommodative.

Whilst the level of government debt remains high, with interest rates remaining at very low levels Japan should be able to service this debt for some time without any major issues.

For some sectors such as insurance and banking profitability will be helped by modest rises in interest rates and for the banks in particular an end to negative depo rates would be hugely positive.

Europe is now benefitting from political stability, unlike the UK and has seen significant inflows from overseas investors including the US. With, to date, Europe producing more positive economic surprises that the States and growth in Europe accelerating versus the US growth rate, the strength of the Euro should not be surprising. Overall Europe remains an area where macro economic conditions would suggest that further positive earnings surprises can occur over the next few years.

Valuations remain attractive relative to their history, on both Price to Book basis and versus other markets and Japan is benefitting from an increased focus on shareholder returns and better corporate governance. Dividend pay out ratios have scope to rise from low levels by international standards. Other market movements may depend on foreign investor sentiment and whether there are more signs that the government and the Bank of Japan’s policies can lead Japan into a period of sustained economic growth. A weaker yen would be of major benefit to the stock market were it to occur.

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Emerging Markets

Although the cuts between Saudi, Russia and other producers have been extended, the market seems convinced that in the short term there will be a persistent period of oversupply in the global market for oil.

The Global Emerging Markets sector offers the potential for investors to achieve above average growth albeit with the likelihood of higher volatility. At present, emerging markets account for more than 50% of world GDP by purchasing parity, and their importance in global equity weightings is likely to increase significantly over the next decade as was demonstrated by the recent inclusion of some Chinese ‘A’ Shares to the MSCI Emerging Market Index.

The Opec supply cut is not a result of a dramatic falloff in the demand for oil which if anything has seen increased forecasts for usage. In China the absolute growth of oil demand is at around 7% p.a., slightly below GDP growth with the increase in demand for passenger vehicles a key driver in that market. The problem for the demand/supply balance has been that non Opec supplies have risen even faster than demand, with US shale producers benefiting from technological improvements which have lowered their cost curve. These producers, initially hard hit when commodity prices collapsed in 2014, have become leaner and more efficient and the rig count for US onshore oil production has grown rapidly in the past 12 months. Furthermore, renewable energy producers are now able to compete without subsidies.

The big unknown fear out there for oil producers is electric vehicles.

Country effects are often an important factor within emerging markets, and this has been seen to recently in Brazil as new President Temer has been caught up in the corruption scandal.

In contrast Mexico has rebounded as President Trump’s bark has proved worse than his bite.

Many commodity prices have softened in 2017 and within the region, there are losers and winners but it is generally positive for Asia, especially the fall in the price of oil. The opportunities in emerging markets are becoming increasingly theme, country or stock specific with wide dispersions within the investment universe. The growth of e-commerce at a pace even faster than the west has thrown up some exciting investment opportunities in contrast to the regions more cyclical names.

Two Opec countries, Libya and Nigeria, are exempt from the agreed cuts and are both increasing production as rapidly as possible, driven by economic necessity. There has also been an absence of supply disruptions elsewhere but in the short and medium term supply and demand dynamics for oil do not look positive. The one wild card here is whether Saudi Arabia may cut production further to try and support the IPO of Saudi Aramco.

Valuations versus develop markets remain attractive at headline levels and in the absence of a sharp rise in the US currency, the GEM universe continues to offer excellent long term potential to skilled active managers.

Historically, a fall in the price of oil had been seen as a tax cut for consumers, but whilst this remains true for most consumers in the West, it is not necessarily for those in the developing world, which are now a much more important part of the global economy. During 2015 the effects of a sharp fall in the price of oil impacted negatively on the global economy as the spending power of commodity dependent developing countries was severely constrained. There were also concerns that some banks might be too heavily exposed to the energy sector. Overall, however, lower and more stable energy prices are a net benefit to the global economy and through oils impact on inflation, or in this case disinflation, help justify easy monetary policy for longer.

The ECB in particular of all central banks have been sensitive to inflationary pressures driven by a rising oil price, so today’s situation may help explain the continued dovish pronouncements from Europe’s central bank. As the world’s wealthy economies have become less energy sensitive the positive knock on effects from a lower oil price have reduced with lower capex from energy companies a negative.

Fixed Interest There is little new to be said about fixed interest markets.

Despite the actions of bond markets in most of the first half of the year it is hard to be enthusiastic about return prospects. The world is now seeing a synchronised recovery.

As interest rates rise, albeit gradually, yield curves are likely to move higher globally even without a significant pickup in inflation. There have also been some suggestions that the Fed wants to normalise to some degree the Fed Funds rate even while inflation remains low, which could result in a move towards the 2% level. Credit still offers better return opportunities than government bonds, although with spreads having tightened strong stock (issuer) selection will be ever more important.

Most of the negatives from a fall in the price of oil continue to lie in emerging markets, as they did in 2015, many of which have young and restive populations. In the Gulf States a lack of democracy has been balanced out by generous social welfare systems which are now coming under strain, even in oil market leader Saudi Arabia. Countries such as Nigeria and Venezuela, which are encountering economic difficulties, need a higher rather than lower price of oil. One plus for emerging markets is that the oil price selloff has not been accompanied by a strong US currency, meaning domestic monetary conditions can be eased if necessary. The price of oil to date does not pose a major threat to the global economy, but a sharp decline from today’s levels might be more of a negative for the overall global economy than many investors would expect.

Energy Late last year Opec reached a production cut deal with other oil producers, namely Russia, which at the time was described as a temporary measure to bring the global market back into balance.

The Saudi Energy Minister described it as a temporary move but its ineffectiveness might suggest a structural shift has taken place in the oil market. In recent weeks the price of Brent crude has fallen below $45 which means it has lost all the gains since the Opec agreement. Consensus analysts’ forecasts for the oil price had been $50 - $60 at the start of the year.

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Chance or Skill

UNDERSTANDING MARKETS AND RISK THOUGHTS ON PORTFOLIO CONSTRUCTION

Asset prices generally reflect the consensus view of market information. With this in mind it is important to remember that one or two good years of results prove nothing, as chance alone can produce just about any result. Someone in a casino making five consecutive winning bets on the roulette table hasn’t demonstrated skill, and in investments the same is true. Very often a manager having a good short term run can be judged to have significant skill, whereas this is not actually the case. In other words, true manager skill can only start to be ascertained over a minimum of five years (market cycle) and ideally over longer time periods. Most asset classes are quite efficient, though of course this does vary depending on how well researched they are. The better an asset class is known and the broader it’s following, the harder it is to make a non-consensus winning bet against the herd. In some mainstream markets it can be argued it is almost a waste of time to try and find winners, certainly without a specialised approach. Investors are more likely to find superior returns investing in inefficient markets.

Investment Styles Finding inefficiency can be approached in different ways with very often investors described as either value or growth style oriented.

Value investors look to buy businesses at a significant discount to their intrinsic value. For this approach to be successful working out the intrinsic value of a company is important, but not always easy. On the other hand growth investors look to find businesses that will continue to grow faster than the market expects, for longer than the market expects. Other investors try and combine bits of both these approaches. Many value investors rely on mean reversion, both for shares and company profitability or even economies. Even this long standing approach has come into question in an era of QE where markets have been distorted by central bank policy and traditional businesses have suffered disruption, whilst others with monopoly powers have hung on to super high levels of margins with little sign that these are being competed away. For investors wanting a lower risk approach, finding a manager who is rigorous about quality factors but also equally rigorous about the price paid in absolute terms can deliver results with lower than market volatility, in part simply by avoiding big mistakes. Investment approaches favouring quality at any price, or value at any quality, may deliver results over short time periods, but there are likely to be periods of blow ups or disappointment from time to time.

Complex Subject One reason there are few great investors is the complex nature of the subject with no rule always working. Approaches that seem to be delivering results for a time can often be found to have been suited by one particular investment style factor, which when it goes out of fashion leaves investors following this creed disappointed. To be successful as an investor there is a need for perceptive thinking and recognising that it is not always possible to have an edge for outperformance in all market conditions. Most investors would recognise that extra ordinary performance only comes from correct nonconsensus forecasts, but they may not recognise that these by their nature are hard to consistently make. For an investor to achieve superior results there is a need for non-consensus views regarding value to be held. Furthermore, these need to be accurate or, in other words over time an investor needs to get more right than wrong.

Forced Sellers This is not to say that investors cannot make money by investing in assets that are only fair value, as over time markets do tend to rise. One important thing for investors to remember is that as well as buying at the right price, it is important to sell at the correct price, and certainly not to be forced to sell at the wrong price, which for reasons of liquidity can sometimes result in investors dumping stock or an asset well below its intrinsic value. Never being a forced seller of an illiquid asset is an important mantra for every investor to remember.

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Leverage

An investor can be right for the wrong reasons, but wrongly credited with great skill for the call. When looking back at history there has only been one outcome, but at the time when an investment is made there are actually many probabilities and outcomes so the job of an advisor or analyst is to try and work out how likely these favourable outcomes actually were when an investment is successful in deciding whether a manager has skill or luck. There is a large difference between probability and outcome. Some probable things fail to happen.

Another mistake many investors make is to think that results that have benefited from leverage demonstrate more skill, whereas in fact the higher returns have merely been achieved through greater risk. Leverage will magnify either gains or losses and in the case of the latter can force an investor out of an asset, meaning that they cannot stay invested long enough to see a recovery. Over the years leverage has been associated with both high returns, but also with spectacular meltdowns and crashes, most recently in the Global Financial Crisis.

With all investment strategies it is important to remember the quote of John Maynard Keynes “the market can remain irrational longer than you can remain solvent”.

When making investments, as well as having a central expectation, it is necessary to have a sense of other possible outcomes and the likelihood of these. Statistical models can rely on the assumption that future events will be normally distributed, but as we have seen in investment markets tail risk occurs and in an age of disrupted markets and commerce fatter tails are likely. At the end of the day risk can be more a matter of opinion than hard fact until after the event. Even a sophisticated VaR system with 99% probability can see the 1% happen.

Risk vs Return To make above average returns over the risk free rate taking risk is inescapable. This involves understanding risk and also trying to work out when it may be high. Investors also through portfolio construction can control risk. This may initially involve deciding whether a given investment justifies the risk or in other words thinking about the risk adjusted return. A traditional message is that higher risk assets give a higher return, but intrinsically this cannot be true, otherwise these investments would not be riskier. Risky investments can deliver a higher return, but only if they are bought at a time when the return is attractive relative to the risk taken. In other words, the price paid for the investment is key. Riskier investments do offer a prospect of above average returns, but also the possibility of below average returns, and in some cases significant losses.

For most people investment risk is invisible before the fact.

This is because the future is impossible to accurately predict.

Most investors projections cluster around what has happened in history and usually recent history and will only expect small changes from this. Thus in the GFC many people’s worst case assumptions were exceeded. Even looking at averages of bad news can be misleading as if for example investment grade bonds showed a default rate of 1% p.a. over long time periods this 1% could all occur in a very short space of time.

Investors should never forget that it will only pay them to take on extra risk at the correct price or valuation level. Thus recognising risk can start with understanding when investors are paying too little regard. In other words valuation can be the best risk control in an investor’s armoury. This is demonstrated with market sentiment as when investors are not worried and risk tolerant they will buy equities at higher valuation levels than when pessimism pervades. Attempts by investors to avoid risk by buying absolute return products has shown that investing in an area totally dependent on manager skill for return can be extremely risky (or unrewarding) in itself. Central Bank policy has encouraged investors to minimise their concept of risk and to buy riskier assets. In bull markets investors worry more about the risk of missing out than the risk of absolute loss.

Another mistake is for investors to not understand that part of a higher return from an investment may be due to pricing illiquidity which makes the underlying investment inherently risky over the longer term.

Many investors define risk as volatility although some would argue a better definition of risk is absolute loss of the capital invested. The risk of permanent loss is the biggest one an investor should worry about. At times the correct course and the most prudent one may be to avoid taking the level of risk necessary to keep up with an irrational market. The amount of risk in an investment is only a judgement; it is not something that can be measured with complete certainty.

Much of risk is therefore subjective and hard to quantify. Even those using risk tools such as value at risk (VaR) or portfolio beta are reliant on the past data set and the metrics analysed which can alter over time. Many risk systems only look back over the last 10 years, so in a couple of years time the Financial Crisis period will have been stripped out from these risk metrics and may therefore be focused on data gathered in a long running bull market, during which interest rates have mainly been falling.

Central bank policy today with zero or negative interest rates has tempted, or encouraged many investors to make riskier investments than are actually suitable for their own personal objectives. As Warren Buffett has stated “it’s only when the tide goes out that you find out who’s been swimming naked”.

Eventually when the current bull market ends this will be seen in practice. In the corporate bond market some covenant lite issuances has once again occurred, even though it was this part of the market that caused particular problems in the 2007 credit crunch. On the other hand in 2009 when most investors regarded anything risky as unviable, excellent returns could be made for the risk taken.

Probabilities Some investors have lived for years off one great market forecast of an extreme event, but in reality little is proved by this as such calls are not necessarily repeatable and furthermore, in a bull market the best returns go to those who take the most risk.

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Whilst risk is unavoidable, or often invisible, as is the possibility of loss, observable loss only occurs when risk collides with negative events. Successful investing can result in over confidence as the favourable outcome that occurred wasn’t guaranteed at the time the investment was made. The fact that the environment didn’t turn out to be negative didn’t mean it could not have been.

Investors also need patience as market valuations tend to overshoot on both the upside and downside, so for a while an investor will look wrong and possibly to friends and colleagues stupid. Most investors are trend followers, whereas the most successful investors have done the exact opposite. Always remember that at the most extreme point in markets most investors, and therefore the conventional wisdom of the day will be wrong.

When many investors focus on finding an investment that can deliver outperformance versus its benchmark, this is only one half of the equation. Another approach is to find skilled fund managers who can deliver the same type of return, but by taking much less risk. There are funds today that historically have demonstrated this, or in other words have given market type or better returns with lower than market volatility, or drawdown. Focusing on this type of approach is a perfectly legitimate way to look at portfolio construction. Investors successfully controlling risk understand they don’t know the future with certainty. They do however understand there can be negative outcomes and try and guard against this. In today’s world of low rates risk avoidance will probably result in very low returns, but understanding and controlling the risk taken is more important than ever before. For long term investment avoiding losers is just as important as finding winners.

To combat herd behaviour some investors rely on contrarianism but this is something which will only work if the intrinsic value of an investment has been successfully worked out, and even then can go through a period of not working for a number of years. This can be extremely painful and very often investors will capitulate at the wrong time when the trend is going against them. For a contrarian approach to be successful at some stage there has to be a catalyst when this change is accepted by the wider marketplace. This is one reason why diversification in a portfolio is important, in other words holding a number of assets where the return appears attractive versus the risk.

In an environment of central bank support for markets cycles have been suppressed in the short term, but over longer periods the ups and downs remain inevitable. Unfortunately, the timing of a cyclical change is as unpredictable as the extent to which it will occur.

Within equity markets it is not changes in earnings that drives the largest profit or loss, but actually changing valuation which is driven by investor psychology and this psychology swings back and forth like a pendulum. Investors entering the market from mid 2009 through 2010 were buying at a time when the pendulum had swung to extremely pessimistic levels which is why the returns have been so strong since then. Prior to this in the lead up to the Financial Crisis, some conservative fund managers aware of the risks that could lie ahead and the current market valuation levels, had lost client assets through delivering what were considered subpar returns at the time, but in hindsight protected investors capital far better. The fear of missing out demonstrates the influence of the crowd. Investor herd instinct can provide opportunities for valuation and risk conscious investment strategies.

Randomness Investment is not an exact science. By this it is meant that the future cannot be predicted with certainty, neither will specific actions always produce specific results. Over the short term a lot of investing is ruled by luck. Nicholas Taleb in his book Fooled by Randomness explored some of these concepts.

This is very important when assessing a fund as luck or randomness can strongly influence the results of the fund manager, especially over shorter time periods such as less than a full economic cycle. Furthermore, when an investor makes a decision it is done without certainty and what Taleb calls “alternative histories” could have occurred. Many investors achieve prominence because they took considerable risks and won, whilst those that took similar risks and lost are quickly forgotten (or fired!). This is also true in war and led to the phrase of a preference for a ‘lucky general’.

Investment Bubbles Over the years there have been many investment bubbles.

Looked at through the life of its history bubbles are painful for everyone. In the initial stages they are painful for those who refuse to join the herd as seemingly easy gains have been missed. In the later stages when the bubble blows up there is significant capital destruction and over the life of a pension fund investment for most individuals avoiding bubbles is one way to generate above average returns with below average volatility.

This is much easier to write about than deliver in practice as greed and human error push investors the other way.

When assessing investment results it is necessary not to be fooled by randomness or returns generated through luck. In a bull market the highest returns will typically go to those taking the most risk, especially if they apply leverage. The converse is true in bear markets. This helps explain why the number one fund in any particular year can often be amongst the worst performers 12 months forward. It is too easy for investors to convince themselves that luck was skill and is often seen by those favouring a fund that has performed well in the last 12 months. When looking at decision making by any investor including professional fund managers, trying to decide whether the decision made was optimal at the time it was made is a useful way to assess manager skill. Those investors making the biggest or riskiest calls can of course get one or two of these correct, but over longer time periods find themselves succumbing to the law of averages.

To increase the likelihood of success investors need to have a strong sense of intrinsic value and be prepared not to be caught up in herd behaviour. If a price diverges from intrinsic value in either direction it is vital to act. Understanding past cycles is important but more difficult in today’s world which experienced investors have never seen before. It is also necessary to understand investor psychology or behavioural finance aspects when constructing a portfolio.

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Investment skill can be more accurately ascribed to those who have delivered results over a larger number of smaller bets, rather than placing everything on red or black. Just because a particular investment strategy worked doesn’t mean the decision behind it was wise, as equally important is whether when it was made the decision would not have proved to be disastrous in different scenarios or outcomes to the economy or particular company invested in.

This is where valuation is important as investing when valuations are low gives a margin of safety and is ultimately the best long term risk control. Whilst arguments persist about whether past performance is an indicator of the future, there are certain fund managers and certain companies with a proven record of navigating through difficult periods without suffering the full rigours of a market or economic downturn and these have often proved to be repeatable investment strategies.

Being happy that the decision made was logical and informed is perhaps more important than whether as a one off event it proved successful. Prudent investors will look to build a diversified portfolio that will not actually try and maximise returns under just one scenario, but provide positive outcomes under a number of scenarios and avoid disaster in worst case outcomes. Many fund managers argue that it is easier to find consistent valuation anomalies on stock by stock basis, rather than making big macro calls between asset classes.

A portfolio positioned for a number of outcomes, or in other words diversified, whilst perhaps looking boring or pedestrian in good times, over a number of market cycles are likely to produce the better returns, whilst also avoiding the behavioural finance risks of heavy losses. It can be hard for an investor suffering heavy losses to avoid the power of herd psychology.

Forecasting

Defensive Investing

In any form of forecasting, whether its stock markets or the weather, there is a tendency to extrapolate the recent past into the future. This can work for a large period of time, but will miss turning points and this is when large amounts of money can either be lost or opportunities missed to make significant returns. Investors need to allow for outliers and ever since the mini crisis caused by the failure of hedge fund LTCM in the nineties it can be seen that even the brightest people can fall into this trap.

A further approach can be described as investing in a defensive manner with part of the reason behind this being that it is possible in the investment world to win by avoiding major mistakes or making less mistakes than other investors. Avoiding large losses is a way investors can afford to stay exposed to potentially volatile assets and avoids a psychological problem of wanting to sell out of something that has seen a severe price decline and therefore missing a recovery. Even if this approach only delivered average results over full cycles, if it was delivered with below average volatility it would suit many clients’ investment objectives.

This is not a negative mindset as it is trying to deliver higher returns through not having to recover from low lows. In other words an investment that falls 50% then needs to rise 100% to recover the losses incurred.

Understanding portfolio correlations and how to diversify these away without being part of a zero sum game are very important portfolio construction skills and generally ones not well understood. Psychological forces known by behavioural finance analysts understand that these factors are behind many unsuccessful investment strategies.

Successful investment involves not succumbing to optimism at a high point of the cycle, but also avoiding pessimism at the low point. In the run up to the Financial Crisis many investors mistook leverage for genius.

Over longer investment periods such as the life of a pension fund for an individual, there will always be some large stock market drawdowns and avoiding the full extent of market losses in these crashes is an important way of delivering above average returns over the longer term. In market crashes concentration and leverage are often two features of a badly hit portfolio and both are typically a result of over confidence by an investor who believes they can forecast the future with certainty. Markets do tend to go up over the longer term, so having a portfolio that is able to get through the tough times and then enjoy the payoff from investing in risk assets has a lot to be said for it. At times this will involve foregoing maximising returns in good times.

For any investor to achieve superior results they need to have superior insight and successful investors recognise it is not possible at all times. It is also vital to have a good understanding of value, with valuation the best form of risk control. Even if an investment is held for a long time period, overpaying for it rarely mitigates from this error.

Economies and markets have both up and down cycles and these do not last forever. The investing herd move in pendulum like patterns from optimism to pessimism and this allows opportunity for those able to look at markets in a rational unemotional way risk and control risk at the core of defensive investing and unlike in sport it is possible to win in investment simply by making fewer mistakes than the average.

Another element in defensive investing is what Warren Buffett calls investing with a margin of safety, or margin for error. These are investments that will still produce reasonable returns, even if the future does not unfold as expected.

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SUMMARY

This year markets have benefited from a synchronised global recovery at a time that monetary policy remains accommodative. This ‘goldilocks scenario’ of growth neither too hot nor cold provided investors with what we described in the last Outlook as the ‘Best of Both,’ Next year it is likely that the Trump administration will enact something in the way of tax cuts and infrastructure spending thus extending the US economic cycle and prolong the global economic recovery. This current sweet spot for equity markets may persist for a while yet, although the market’s reaction to central bank talk of tighter monetary conditions in the last week of the quarter is a foretaste of what is to come with the likelihood of increased volatility after a period of unusual calm in markets. Tighter monetary policy, may lead to some level of multiple contraction resulting in markets lagging earnings growth.

does occur high levels of leverage are likely to impact negatively and operational gearing for some companies will have risen. This suggest investors should hold diversified portfolios rather than trying to win big by a few strong calls. Going back to basics, whilst fundamentals are improving, valuation is not on investor’s side. Investor sentiment is mixed. There also remains the possibility of policy mistakes by central banks, as whilst it is accepted that the sensitivity of the global economy to an increase in interest rates has increased it is impossible to measure the extent of this.

Within equity markets both Europe and Asia have scope to continue to play catch up and are at last seeing earnings upgrades. Credit continues to offer the best risk/return in fixed interest, with well managed strategic funds where managers have proven macro skills a worthy part of an investor’s portfolio. Absolute return whilst having a place in portfolios is dependent on manager skill so easy gains are not possible. At this stage of the cycle an appreciation of risk and strong manager selection is important.

As discussed, in markets where there is little margin of safety due to full valuations risk is something investors also need to consider, as when an economic downturn

GRAHAM O’NEILL Director at Independent Research Consultancy Limited.

Graham is an investment researcher of international note and has been working in this area for over 20 years. He began his career in the stock broking industry before becoming an institutional fund manager where he practiced both in Ireland and the UK where he worked in senior roles with a number of institutions including Royal Life holdings, Guardian Royal Exchange and Abbey Life.

Throughout his career, he has managed multi-million Euro funds and developed innovative investment fund concepts. Seeing the need for non biased, critical analysis of the investment industry, Graham began work as an independent investment researcher in 1992 and since then, principally, he has provided services to financial institutions. Graham is also a director of RSM Group, a leading UK investment research company.

Through his research process, Graham filters through the broad range of Irish and International investment fund managers for those investment managers who consistently perform best.

He conducts in the region of 150 teleconference meetings and on site interviews with asset managers in UK, Europe, China, Hong Kong, Singapore and Australia. Following on from these meetings, Graham produces detailed research notes.

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BUSINESS BRIEFS 6% INCREASE IN NUMBER OF START-UP Almost 1,900 start-up companies were established on average each month in the first six months of 2017, an increase of 6% compared to the same period in 2016.

The most popular sector for company start-ups was professional services, with almost 20% of new companies operating in this area, according to research from business and credit risk analyst Vision-net.ie.

This was followed by finance which saw an 18% rise in start-ups in the six months to June 2017. Other sectors that performed well include social and personal services, construction, real estate, and agriculture. In terms of the geographic location of the start-ups, Dublin proved to be the dominant area with almost one in two start-ups established in the capital region.

IRISH EMPLOYMENT GROWTH SET TO CONTINUE ACCORDING TO REPORT

corridor centred on Dublin and Belfast – raising new questions around capacity constraints.

According to the report, improving domestic conditions are supporting many of the sectors hardest hit during the recession towards recovery, with wholesale and retail to grow by 19,400 jobs and construction to be boosted by 18,500 jobs according to the forecast.

Continued strength in the professional, scientific and technical sector is set to be supported by an upturn in public sector employment as government spending levels improve, with public administration and defence; and health and social work; each projected to grow by more than 10,000 jobs.

Meanwhile agriculture, which has been well documented as the most exposed sector to Brexit, is forecast to lose 12,800 jobs by 2020. With agriculture and industrial employment making up approximately 20% of employment in 19 of Ireland’s 26 counties and four of Northern Ireland’s 11 councils, both jurisdictions are likely to be significantly impacted if a free trade agreement cannot be reached, or some form of unique status designation for the sector is not achieved.

The latest Economic Eye Summer Forecast released by EY predicts economic growth across the island of Ireland to remain steady at 2.4% until the end of decade. However, the country’s resilience and competitiveness will continue to be tested in the face of global and economic political developments, according to the report. GDP growth in the Republic of Ireland is expected to reach 2.6% in 2017, with an average growth rate of 2.6% per annum until 2020, bolstered by continued consumer spending.

EY Economic Eye finds that the all island economy is expected to grow, with total employment across the island of Ireland set to increase by 29,000 jobs in 2017.

The Republic of Ireland will, however, fare better than Northern Ireland, with almost 91,000 jobs forecast to be created by 2020.

Furthermore, EY Economic Eye finds that within certain sectors such as agriculture, agri food and professional services, jobs growth is clustered around an east coast

swoop by 3% as it believes incremental reductions would be a piecemeal response given that previous experience has shown small reductions do not tend to have a positive impact on consumer spend.

The group is also calling for a general cut in consumption taxes, the reduction in the cost of doing business, increased funding to get retailers online, increased infrastructural investment, more Garda resources and increased town renewal funding in its Budget submission.

Irish retailers operate 45,000 businesses with 282,000 employees directly employed in the industry, while the associated employment multiplier effect increases that figure exponentially. Retail activity contributes €5.7 billion to the Exchequer on an annual basis - €4 billion in VAT and €1.7 billion in PAYE.

RETAILERS CALL FOR A 3% CUT IN VAT TO COMBAT BREXIT Retail Excellence has called on the Government to reduce VAT by 3% in Budget 2018 in an effort to protect retailers from the effects of Brexit. VAT currently stands at 23% and Retail Excellence said that high VAT rates affect consumer confidence and sentiment and this is further exacerbated by the negative VAT differential between Ireland and the UK. This has contributed to the further development of online shopping trends which has led to €600,000 of spend every hour being fulfilled by businesses operating outside of the country.

The group said said the VAT rate needs to be cut in one fell

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it to grow online, versus 49% using mobile broadband.

However, mobile phones or smartphones were used to access the Internet away from home or work by 87% of individuals in 2017.

The most common activity carried out by Internet users at home was finding information on goods and services.

This was followed by email, social networking and Internet banking. Clothes and/or sports goods were the most popular items sought online by Internet users with the next most common types of Internet purchases being holiday accommodation and event tickets.

Seven out of ten Internet users said they went online every day. Daily usage of the Internet has increased nine percentage points since 2013.

ALMOST ALL IRISH HOUSEHOLDS ONLINE WITH SHOPPING THE MOST POPULAR ACTIVITY The number of Irish households with Internet access at home continues to grow. Data from the Central Statistics Office (CSO) indicates 89% of households are now online, up two percentage points on 2016. In addition, 81% of Internet users went online in the three months prior to the survey being undertaken. Not surprisingly, Internet usage was most popular with younger adults.

Fixed broadband remains the most common type of Internet access at home with 84% of households using

The Property Price Register reveals that approximately 10,800 transactions were recorded during the first quarter of 2017 with a total value of €2.8 billion. Due to the time lag in logging data to the Property Price Register, quarter one data is the most accurate data available. If one excludes multi-family/portfolio sales, the figure declines to approximately 10,200, of which 3,300 were in Dublin. On an annual basis, the volume of sales grew by 9% nationally and 10% in Dublin.

In comparison to the increasingly limited 2nd hand stock, the volume of new dwelling sales recorded on the Property Price Register rose by 23% nationally during the opening quarter of 2017, with a 33% increase in Dublin. It is worth noting that the average value of new dwellings sold increased by 8% on a national basis, while the average value in Dublin remained constant.

In contrast, average values of new dwellings increased by 38% on a national level in the year to quarter one 2016 and by 9% in Dublin in the same period. The greater stability in the price inflation of new dwellings this year does point to an increase in the volume of starter homes being sold on the market, an early indicator of the positive impact of the ‘help to buy’ scheme.

RISE IN IRISH HOUSE PRICES IN LINE New figures, recently released by Sherry Fitzgerald, show that the average value of Irish houses and apartments rose by 2.5% in the second quarter of 2017, bringing growth in the year to date to 4.4%. This represents an increase on the 2.7% recorded in the opening six months of 2016. House prices in Dublin were somewhat ahead of the curve with average values increasing by 2.8% during the second quarter of 2017. Prices in Dublin have grown by 4.7% in the year to date, compared with 1.8% in the same period in 2016.

When Dublin is excluded from the national figure, the quarterly increase is 2.1%. In the year to date, house prices for the rest of Ireland increased by 4.1%, a moderate uplift on the 4.0% recorded in the same period in 2016.

In the regional centres outside of Dublin, Galway recorded the highest increase of 4.9% during the opening half of 2017, while prices in Limerick and Cork increased by 3.4% and 3.1%, respectively.

AREA OF IRELAND TO BE DESIGNATED EU EUROPEAN ENTREPRENEURIAL REGION 2018

developing policies to transform the area from adversity into “one of the most resilient and ambitious places in Europe”.

David Minton, director of the Northern and Western Regional Assembly (NWRA), the regional body which administers EU development funds, said the award was an opportunity for this part of Ireland to become a more attractive place to live and work for young people.

Minster for Community and Rural Affairs Michael Ring said that the Northern and Western region has not finally received recognition as one of the most vibrant, responsive and entrepreneurial region in Europe.

The European Entrepreneurial Region will see a series of events throughout next year aimed at capitalising on gains and further improving employment and innovation.

Ireland’s northern and western areas are to be designated the EU’s European Entrepreneurial Region 2018 for achievements in reversing a bleak economic outlook.

The EU has said the award comes at a crucial time for Ireland as it stands on the verge of an unknown economic impact from Brexit negotiations. The award identifies and rewards EU regions and cities with outstanding, futureoriented entrepreneurial strategies.

This year’s winner includes eight counties – Donegal, Mayo, Galway, Sligo, Roscommon, Leitrim, Monaghan and Cavan – which together have been credited with

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TIPS TO PREVENT MOBILE CHARGES FROM ROAMING OUT OF CONTROL

What’s Changed?

The rules may have changed, but we all dread that ‘welcome’ message with warnings about maximum data limits from our mobile providers when travelling out of the country.

Over the last five years, the EU has actively worked at reducing roaming charges. However, Simon Moynihan of Bonkers.ie warns that while customers will benefit from better rates and terms, you should not get too comfortable. Instead, speak to your mobile provider first and find out exactly how much data you have available before travelling abroad.

While you can roam at the same price you pay at home, there are limits to the extent. Many plans only offer 1GB for roaming, and 1GB doesn’t go far.

15th June 2017 was ‘Roam Like Home’ day, the day on which the EU enacted new legislation that scraps roaming charges. Sadly, not much has really changed. In this article we’ll tell you what you need to know about Roam Like Home, and how you can save on roaming costs.

Will It Be Unlimited?

No. Even normal data packages already have built-in fair use limits. They are typically generous and most people don’t use them up. According to Virgin, the average customer uses approximately 2.6GB per month. Most unlimited packages have a 5-30GB fair use limit, and if you exceed it, you will be charged for the additional data.

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Fair Use

How Much Is a GigaByte, Exactly?

The EU fair use limits are not always the same. Meteor’s €10 pre-pay plan has a 7.5GB fair use limit and 2.1GB for roaming.

Their bigger bill pay SIM-only package offers 10GB locally and 7.4GB abroad.

You would be shocked to find that 1GB does not go very far well, depending on your preferred usage. For 1GB, you can:

In most cases, bill-pay plans have more restrictions than prepay plans.

•

listen to about 160 songs on Spotify

•

travel via Google Maps for 17 hours

•

watch Youtube videos for 300 minutes

•

or watch an hour of Netflix.

Many plans still allow only 2GB of roaming, so when you travel a lot, you could easily hit your limit.

What Is Free?

How to Save Data While Roaming?

Depending on your phone usage, you may be able to find a plan that offers services such as data, texts or calls free of charge. In most cases, a bill-pay plan that charges more than €30 a month will provide the most freedom.

You will still receive the welcome message when you roam and you will get warning texts at certain intervals.

What Will They Charge?

Although penalties are capped under new EU laws, you will be subject to penalty fees if you exceed your pre-determined data roaming limits while travelling abroad.

Roaming charges for exceeding the limit, starts at €7.70/GB of data. These charges are set to decrease to €2.50/GB by 2022.

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•

Ask your provider for the exact data allowance on your specific plan.

•

Switch off roaming and use Wifi whenever you can.

•

WhatsApp is the cheapest option for messaging, as it uses much less data compared to Facebook and texting.

•

Turn off auto-updates on apps, and disable Facebook’s auto-playing of videos. You can leave notifications on.

•

Download shows from Netflix before you travel if you want to use that to keep small kids entertained and turn off data before giving them your phone.

•

If you have not reached your data limit at home, you’re unlikely to exceed it while travelling. Relax, but be sensible and enjoy!

Dervilla Whelan

Sarah Keane

(BBS, CTA) Managing Director

(BAAF, FCA, CTA, QFA) Director

Dervilla Whelan is the Managing Director of DLS Capital Management Ltd and also one of the founding members of DLS Partners. She was previously a taxation partner in Baker Tilly O’Hare (now part of Baker Tilly Ryan Glennon) and is a graduate of Trinity College, Dublin and the Institute of Taxation in Ireland. Her key skills include advising clients on all aspects of their financial affairs, including advising on the appropriate structures required for all types of investments and pensions. Dervilla is heavily involved in the Family Office service for our high net worth clients.

Dervilla’s involvement with both DLS Capital Management Ltd. and the tax practice, DLS Partners, ensures that her clients benefit from a holistic approach to all of their financial affairs

Sarah Keane is a graduate of Dublin City University in Accounting and Finance and a Fellow of the Association of Chartered Accountants (FCA).

She is also a member of the Institute of Taxation in Ireland (CTA), and the Professional Association for Financial Services in Ireland (QFA). Her key skills include advising clients on all aspects of financial planning, including retirement planning strategies, taxation and investment advice.

Sarah is highly experienced in the preparation of investment financing strategies for individuals and companies. Sarah is also heavily involved in the Family Office service for our high net worth clients.

Graham O’Neill

Stephen Cahill

Graham is an investment researcher of international note and has been working in this area for over 20 years. He began his career in the stock broking industry before becoming an institutional fund manager where he practiced both in Ireland and the UK where he worked in senior roles with a number of institutions including Royal Life holdings, Guardian Royal Exchange and Abbey Life. Throughout his career, he has managed multi-million Euro funds and developed innovative investment fund concepts. Seeing the need for non biased, critical analysis of the investment industry, Graham began work as an independent investment researcher in 1992 and since then, principally, he has provided services to financial institutions. Graham is also a director of RSM Group, a leading UK investment research company.

Stephen Cahill is the Tax Manager at our Tax Practice, DLS Partners. He graduated from DIT and is a member of both the Association of Chartered Certified Accountants (ACCA) and the Irish Tax Institute. Stephen is responsible for all areas of Tax, including, VAT, PAYE, Income Tax, CGT and Corporation Tax. He also is involved in the preparation of Financial Accounts for sole traders and limited companies and assists in the preparation and review of monthly management accounts for larger corporations.

Independent Consultant

(BSc (Marketing), ACCA, CTA) Tax Manager DLS Partners

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RANGE OF SERVICES RETIREMENT PLANNING

FINANCIAL PLANNING

•• •• •• ••

•• Financial Planning is central to our

Tax-effective funding for retirement.

Income Planning for your retirement Personal Fund Threshold calculations Protecting the underlying value of your pension fund throughout retirement •• Advice on the most tax effective drawn down of your pension vehicles •• Taking transfers from Defined benefit Pension Schemes

PENSION STRUCTURE ADVICE •• Personal pensions •• Self Invested Personal Pensions •• Company/Executive pensions

- Defined Benefit Schemes - Defined Contribution Schemes •• Small Self Administered Schemes •• Personal Retirement Saving Accounts (PRSA’s) •• AVC’s

service offering

•• We compile fact finds based on client’s

personal and financial details •• We produce a Financial Plan for each client, showing their current financial position and their future financial objectives.

•• The Financial Plan will encompass all areas of a client’s financial position, e.g. investments, borrowings, protection policies and pension policies •• Financial Plans are reviewed on an annual basis, taking into account any changes in a client’s personal and/or financial circumstances.

FAMILY OFFICE SERVICE •• Preparation of Quarterly Net Worth Statements

•• Preparation of a comprehensive

INVESTMENT ADVICE •• •• •• •• •• •• ••

Managed Funds Exchange Traded Funds Unit Trusts Investment Trusts Tracker Bonds Deposits Employment and Investment Incentive Schemes (EIIS) •• Structured Products •• Qualified Investment Funds (QIF) •• Renewable Energy Investments

•• •• •• ••

database which contains all information on Assets and Liabilities, thus facilitating instant access to information Centralisation of costs on all Personal & Investment Properties Appraisal of Investment Opportunities Monitoring of Investments Attend meetings relating to Investments on behalf of clients

DLS Capital Management 25 Merrion Square Dublin 2

www.dlscm.ie info@dlscm.ie

DLS Capital Management is regulated by the Central Bank of Ireland

(p) 01 6119086 ( f ) 01 6619180