The Science of The Certain

The most memorable episode of Sir David Attenborough’s superb 2014 Life Story series was the one about the tiny long-eared Jerboa, a rare nocturnal mouse that lives deep in the Gobi Desert...

John Miles 17th October 2016

This little critter has very big ears. He is so acutely sensitised to sound that a lightning-quick reaction in his enormous rear legs causes him to leap several feet into the air at the slightest noise that invades the deathly hush of his Gobi night. The result is wonderfully comical: his involuntary response being totally disproportionate to the stimulus that caused it.

After the surprise outcome of the European Referendum on the 23rd June 2016 there was a ‘run’ on the commercial property investment funds on an unprecedented scale. It caused a mass ‘gating’ of them to prevent further cash outflows: something not seen even in the aftermath of the credit crunch in 2008. Investors in these funds were effectively rushing to convert their ‘bricks and mortar’ investments into cash: something that was losing 20% of its value against the dollar at the same time.

A mass, knee-jerk contagion of ill-sentiment infected these funds (that we are told only make up, in any event, 5% of the UK commercial property investment world) that seemed to have little or no basis in rational thought.

‘Uncertainty’ was blamed. Investors don’t like uncertainty. Uncertainty isn’t ‘normal’. And so we brace ourselves for more irrational market behaviour as future uncertainties form an orderly queue to darken our investment horizon: the American election, the triggering of Article 50, the Italian banking crisis… No sooner do we survive one uncertainty than another looms to threaten the status quo of our daily ‘norm’.

It is undeniable that investors don’t like uncertainty. We see on a daily basis how future uncertainty affects our business. On a practical level, we see it in towns and cities that are subject to large scale future development proposals. 5 years or more before a shovel is put in the ground occupiers and investors will start (with good reason) worrying about which pitches will suffer as a result of shifting footfall patterns caused by the new scheme. Leases will only be renewed short term or with break clauses, empty shops will be more difficult to let and landlords will see their investment values falling and will be reluctant to invest further in their holdings; the whole town starts to suffer. We call this long shadow of uncertainty ‘blight’.

Things used to be a lot less certain than they are today. Only a generation ago it was uncertain whether one would come back from a war alive or not terribly injured. A generation before that and the greatest uncertainty in life was whether one would actually survive childbirth. Things were put into perspective. Mercifully, today we (in our rich western world at least) are not faced with these daily uncertainties.

So it now seems that the slightest provocation which threatens our ‘certain’ world is prone to send us into an existential crisis: our own Jerboan leap. Not content with keeping such behaviour ‘human’ we have imbued such irrationality into our machines: earlier this month a fat fingered moment and a comment from a French Prime minister was enough to wipe 6% off our currency in a matter of minutes in what is now being termed a ‘flash crash’. Complex algorithms, designed to exploit the tiny margins around the expected ‘norm’ went into tailspin when faced with something out of the ordinary.

Our surprise at encountering the unexpected is derived from a growing belief that we can predict the future. Our Fund Manager clients are asked to spend half of their working lives reporting: reporting on what has happened to their clients’ investments, what is currently happening to them and what is likely to happen to them in the future. We demand that forecasting crosses the Rubicon from art into science.

But is our control freakery over maintaining the certain actually making our life less certain? One where even minor stimuli are causing disproportionate reactions? Perhaps we are losing our evolutionary ability to deal with the unexpected. Many are seeking to exploit this. An increasingly common buzzword in our business and investment circles is ‘disruption’. To cause disruption in a market, to be a ‘disruptor’, is seen to be an innovator: someone who stirs things up from the norm to the benefit of everyone. The average all property yield (IPD) stands today at around 5.50%. The Bank of England interest rate is 0.25% with no signs of increasing and ‘all in’ borrowing costs of sub 3% are very common. Banks are willing to lend 65% loan to value on good commercial property investments. Some would argue that we have never had it so good.

But we do live in an uncertain world…

John Miles 17th October 2016