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For Mendeleev, read Messervy

Finding topics of conversation that will engross all of us on the Investment team equally – aside from macroeconomics and financial markets, can sometimes be a challenge. Fashion is interesting for some, as are the arts, baking and fine wine. Questions about favourite music/movies/books often leads to a lively debate, whereas discussions around politics can noticeably disengage and there is no doubt cricket attracts the attention of just a few! There is, however, one topic that regularly prompts noticeable enthusiasm from virtually all of us – this being anything to do with science. With this insight now shared, you will appreciate UNESCO designating 2019 as the the ‘International Year of the Periodic Table of Chemical Elements’ (IYPT) has stimulated lively conversation across the team over the last few months; or perhaps we should say periodically.

The Periodic System was discovered in 1869 by the Russian scientist, Dmitri Mendeleev and the IYPT commemorates the 150th anniversary of its establishment. UNESCO has sought to recognise Mendeleev’s work as one of the most important and influential achievements in modern science; reflecting the essence not only of chemistry, but also of physics, biology and other science disciplines. There have been celebrations around the world and the IYPT has been used as an opportunity to reflect upon the periodic table’s history, the role of women in research, global trends and perspectives on science for sustainable development. 

So why all this fuss about the Periodic Table?

UNESCO IYPT website describes the Periodic Table as “a unique tool, enabling scientists to predict the appearance and properties of all matter on the Earth and in the rest of the Universe”. This grand statement necessitates a quick review of what the Periodic Table actually is. In short, it is a chart of the chemical building blocks of matter. To date, humans have observed 118 unique building blocks, both natural and artificially made. Each of these, known as atomic elements, contains a positively charged core (known as the nucleus), which is usually surrounded by a cloud of negatively charged particles, called electrons. Focusing on the nucleus, it consists of positively charged particles – known as protons – and neutral particles, known as neutrons.

The one feature that defines an atomic element is its atomic number, that is, the number of protons in its nucleus. Hydrogen has one proton, so its atomic number is 1 and uranium has 92, so its atomic number is, an unsurprising, 92. Each atom can exist in several different versions of itself – known as isotopes – in which there are different numbers of neutrons in the nucleus. 

 

Copyright © 2018 IUPAC, the International Union of Pure and Applied Chemistry.

What was the genius of Mendeleev?

The Periodic Table is arranged into seven rows called ‘periods’ and eighteen columns called ‘groups’. Mendeleev was not the first person to try to organise the elements, so what made him into a scientific ‘Hall of Famer’? 

Unlike those other scientists, Mendeleev predicted there would be more chemical elements discovered – at the time only 63 were known. Based on the patterns and trends in the reactivity observations being made, he left blank spaces in his table where he thought new elements would sit and predicted their atomic number and likely chemistry. For example, he left a gap for an element he termed eka-aluminum; this place being one step away from aluminum. No one had discovered this element yet but Mendeleev was able to forecast many of its characteristics, based on the properties of the elements surrounding it. Six years later, the French scientist, Paul Emile Lecoq de Boisbaudran isolated this element and called it Gallium. 

Put simply, Mendeleev’s study of patterns, trends and behavoiurs had enabled him to predict the future. 

Now, wouldn’t it be wonderful if investors could find a way of applying Mendeleev’s principles to predict the future direction of asset prices?

Over to you, Jack  

In August this year we announced the news our colleague, Jack Messervy, had successfully completed his Chartered Market Technician (CMT) qualification. When not overseeing the day-to-day operations of our investment business, Jack is now committing time to technical analysis. In finance, this is a methodology that uses patterns in market data to identify trends and make predictions. 

To a CMT charter holder, thinking in patterns is central to managing money; whether these are derived quantitatively or qualitatively; whether they are framed in terms of macroeconomic fundamentals or price action; or whether they describe catalyst-driven events or longer-term investor behaviour. If every market situation was perceived as entirely unique, the theory is we would have no basis for trading or investing capital. Market technicians believe every decision to take risk presumes the perception of a pattern that is associated with opportunity. Charts are not just used as crystal balls or predictive tools, but rather as ways of framing hypotheses about market behaviour that yield favourable risk-reward dynamics.

Implications for portfolios

Like all things in the world of finance, successfully applying theory in practice is much more challenging than text books would have us believe. Moreover, in a world where market manipulation has never been so pronounced or prices so distorted – think negative interest rates – one could argue the current investment environment is unique, as it is the result of a 10-year experiment, which is still ongoing. 

 

Source: Bloomberg

This technical chart is an example of those we use in our investment process. It helps us gauge when we should be committing cash to markets, particularly new portfolios, and when we should be keeping our powder dry. Moving averages, price momentum and relative strength indicators can reveal the ‘mood’ of investors, in the same way sentiment surveys and option-writing data can provide insights too. Whilst we jest that interpreting these charts is akin to reading tea-leaves, there is no question they have added value to our decision making. If only we could apply such technical analysis to forecasting election results, trade deals and anticipating Trump’s next tweet – over to you Jack…

Julia Warrander and Russell Waite

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