It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

VT Tyndall Unconstrained UK Income Fund

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

Our piece a few weeks ago asked the question ‘Where have all the bulls gone?’ In it, we focused on what we perceived at the time to be extremely negative sentiment in markets. Amongst the myriad of issues for investors to worry about, the key one seems to be the prospect of an imminent global recession. Our crystal ball is without doubt no clearer than anyone else’s, however we are struck by the unanimity and complete conviction coming from increasing numbers of those calling a recession in our immediate future, particularly as history would suggest a generally poor ability to ever, collectively, predict recessions correctly.

We have been just as equally struck, in recent weeks, by the number of conversations we have had with company management teams who, whilst acknowledging a high degree of uncertainty on the outlook, currently see no meaningful slowdown. This was perhaps best summed up by the management of a large high street retailer who, when asked about the cost of living crisis and the consumer slowdown in the UK, replied “you wouldn’t know it was here”.

With this in mind the quote in the title, allegedly from Mark Twain, seems quite apt at this particular juncture. So, in this holiday shortened week, we present a few charts that, in our view, offer reason to be somewhat less pessimistic on the near-term economic outlook.

This indicator seems to have a very strong record of anticipating US recessions, going back to 1973, including the very brief Covid recession of 2020. As you can see, there would appear to be no cause for alarm currently.

Conditions in the credit market are vitally important to the economic outlook and not only is the availability of credit showing no typical recessionary characteristics but, in the US at least, it is currently easier to get hold of than usual – a very different backdrop to 2008/9 and 2020.

In Europe, the widely followed IFO survey of German business confidence shows a strikingly similar pattern to the previous chart. Corporate confidence levels are currently pretty high and, believe it or not, actually rising, again painting a very different picture to the 2008/9 and 2020 experience.

Meanwhile, here in the UK for the first time ever (we think), there are now more job vacancies open than there are unemployed workers, as shown in the chart above. At the risk of repetition, the situation stands in stark contrast to 2008/9 and 2020.

Whisper it quietly but there might just be some light at the end of the inflationary tunnel also. The above chart of longer-term inflation forecasts for the US has been falling fairly rapidly in recent weeks, returning to more ‘normal’ levels.

Even here in the UK, whilst inflation still looks like rising further in the very short-term, just maybe, it will prove to be more transitory than people currently now think, certainly if the above relationship continues to hold true.

For sure we can be certain there will be another recession in our future and it is entirely possible, given current headwinds, that it will come fairly soon. But then again, after the highly unusual economic developments of the past few years, it is equally possible that the next recession could be several years away. We are merely seeking to add some balance to a debate that has, to us at least, become far too one-sided, particularly when the tangible evidence to support it remains, for now, relatively conspicuous by its absence.

Finally, but not entirely unrelated, a shameless plug for equity income investing, irrespective of the prevailing economic conditions. The chart below shows the returns and volatility of US stocks, over the last 64 years, broken down by dividend yield quintile. Economic conditions have varied enormously during this time and have included periods of recession, strong growth, high inflation, low inflation etc. Likewise, there have been numerous ‘fashionable’ trends within markets, including the recent multi-year episode of extreme outperformance of ‘growth’ against ‘value’.

Irrespective of those different market environments, the chart reminds us of the importance of dividend yield, not just in delivering superior total returns over time, but also with considerably lower levels of volatility. Regardless of our near-term economic prospects, from a medium-term perspective, what’s not to like!
1st June 2022
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This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg.
Not for retail distribution – this document is intended for professional clients only

WARNING: All information about the VT Tyndall Unconstrained UK Income Fund (‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free
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