Lord Rothschild Letter to Investors (via RIT Capital):

In my half-yearly statement I sounded a note of caution, ending up by writing that “the climate is one where the wind may well not be behind us”; indeed we became increasingly concerned about global equity markets during the last quarter of 2015, reducing our exposure to equities as the economic outlook darkened and many companies reported disappointing earnings. Meanwhile central banks’ policy makers became more pessimistic in their economic forecasts for, despite unprecedented monetary stimulus, growth remained anaemic.

Not surprisingly, market conditions have deteriorated further. So much so that the wind is certainly not behind us; indeed we may well be in the eye of a storm.

The litany of problems which confronts investors is daunting:

• The QE tap is in the course of being turned off and in any event its impact in stimulating asset prices is coming to an end.
• There’s the slowing down to an unknown extent in China.
• The situation in the Middle East is likely to be unresolvable at least for some time ahead.
• Progress of the US and European economies is disappointing.
• The Greek situation remains fraught with the country now having to cope with the challenge of unprecedented immigration.
• Over the last few years we have witnessed an explosion in debt, much of it repayable in revalued dollars by emerging market countries at the time of a collapse in commodity prices. Countries like Brazil, Russia, Nigeria, Ukraine and Kazakhstan are, as a result, deeply troubled.
• In the UK we have an unsettled political situation as we attempt to deal with the possibility of Brexit in the coming months.

The risks that confront investors are clearly considerable at a time when stock market valuations remain relatively high.

There are, however, some influential and thoughtful investment managers who remain sanguine about markets in 2016 on the grounds that the US economy is in decent shape – outside of manufacturing – while they feel that economic conditions may be improving. To them, the decline in these markets may have more to do with sentiment than substance. Others are less optimistic but feel that the odds remain against these potential difficulties materialising in a form which would undermine global equity markets. However our view is that 2016 is likely to turn out to be more difficult than the second half of 2015. Our policy will be towards a greater emphasis on seeking absolute returns. We will remain highly selective when considering public and private investment opportunities. Reflecting this policy, our quoted equity exposure has been reduced to 43% of net asset value.

There’s an old saying that in difficult times the return of capital takes precedence over the return on capital. Our principle will therefore be to exercise caution in all things in the current year, while remaining agile where opportunities present themselves. Problems have a habit of creating opportunities and I remain confident of our ability to identify and profit from them during 2016.