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Rathbones: Digital hygiene

Investment news for advisers and paraplanners

16 May 2017

Rathbones: Digital hygiene

The development of Germ Theory during the late-1800s led to hospitals becoming bastions against disease rather than minefields of micro-organisms.

It didn’t take much to improve the hospitals either. Mostly, it was as simple as doctors and nurses washing their hands before and after treating patients and keeping wards clean. Now, almost 130 years later, many of our hospitals were crippled by a virus of human creation. Last week, the WannaCry ransomware virus infected many computers around the world, locking up computer files and demanding payment for release. The disruption to the NHS meant many patient records were inaccessible causing surgeries and urgent care to be delayed. The NHS was in esteemed company: US postal giant FedEx, the German railway, the Russian interior ministry, China’s largest energy company, Renault and Telefonica. 

WannaCry exploited vulnerabilities in WindowsXP, an operating system that is 16 years old, to spread rapidly between connected computers. It has been reported that the virus used cyber-weaponry stolen from the US National Security Agency to allow it to spread itself within networks, rather than relying on human error. But its penetration technique was old-fashioned. If you grew up in the digital age, basic internet safety is as easy and automatic as washing your hands before surgery. However, for those of a different era, slip-ups are easy. And it only takes one mistake for an entire organisation to be infected. 

Perhaps one of the more worrying aspects of this debacle is the reminder that so many critical organisations and large businesses are still using obsolete technology. Windows stopped offering mainstream support for WindowsXP in 2009. In the Information Age, the risk and cost of transferring your back-end systems – the cardiovascular system of your organisation – increase exponentially with the size and complexity of your work.

Unfortunately, large risks and big payments mean much of the critical infrastructure of our society – hospitals, banks, railways and government – are encouraged to bolt on new computer systems and eternally delay much-needed replacement. Security breaches like this are the result. 

It’s an unenviable position to be in: take a massive gamble today or a million small ones tomorrow.



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                                                                             Source: FE Analytics, data sterling total return to 12 May

Down on Main Street 

Despite increasingly worrying populism and rising geopolitical risk over the past year, equity market volatility has steadily fallen to near record lows.

The VIX index, which measures implied volatility of the S&P 500 (what investors expect it will be in the future) is at 9.8. That’s extremely low, but even at those depths it’s undershooting realised volatility (what actually happens).

And this is not just an American phenomenon – it’s global. Over the last three months, the annualised volatility of the MSCI Word Index was 6.1%. To put that in context, global equity volatility has averaged almost 15% over the last 25 years. 

Markets seem relatively unbothered by the populism being stirred up in the West by stagnant wages. Similarly, markets imply that rising tensions in Asia and Eastern Europe will either fizzle out or have little effect on investment returns. Even the steady tightening of US interest rate policy has little influence over equity prices, while European equities are still appreciating despite the belief that the European Central Bank could soon start reducing the amount of bonds it buys for its quantitative easing programme.

Could this lower volatility be a symptom of modern markets? With ever more money flowing into index-trackers and the proliferation of high-frequency traders and quant funds, could they be creating self-reinforcing feedback loops? Maybe this increased dependency on momentum is making markets swing from exceptionally calm periods to volatile periods that are very wild indeed.

Volatility will return to equity markets, but given the indifference investors have shown to politics and the risk of war, what could trigger it?

Metals and oil markets have wobbled recently as investors worry about Chinese economic growth slowing further. China’s government has been pumping the economy with stimulus for several years, but has recently begun tightening liquidity. This should lead to lower output and lesser demand for raw materials. The Shanghai Stock. 

Exchange Composite Index has fallen almost 6% since mid-April. China has receded somewhat from Western worry radars, but an accelerating slowdown in the East’s largest economy would likely cause alarm.

Western consumption has been driving much of the market optimism lately. We are carefully watching real wages in the UK and US, and whether any weakness is flowing through to lower spending. Wage growth has been pretty muted on both sides of the Atlantic for some time now, but that has been more than offset by steadily rising house prices. Property prices cannot continue to shoot for the sky. If there is to be sustainable growth in demand, it will need to come from better pay. At the moment, any boost in pay has been eaten up by inflation. UK wage growth will be announced alongside unemployment figures this week. We will then be able to compare that with the inflation print for April. It’s expected to rise to 2.6% from 2.3%.


Still, it’s not all bad news: while the US headline average wage has been pretty stagnant, there is strong survey evidence that wages are actually rising rapidly among the lower-skilled. This dynamic may not be flowing through to the headline number because wages for those at the middle and top-end (which are larger and skew the mean more) have slowed or slightly declined. If that is the case, lower skilled workers are most likely to spend more of their pay, leading to greater demand in the real economy.


It is argued that the American recovery from the global financial crisis was founded on bailouts for financiers and windfall gains for rich investors. The more this economic resurgence focuses on Main Street, the more sustainable it is likely to be.



UK 10-Year yield @ 1.09%

US 10-Year yield @ 2.33%

Germany 10-Year yield @ 0.39%

Italy 10-Year yield @ 2.25%

Spain 10-Year yield @ 1.62%

Julian Chillingworth
Chief Investment Officer

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