Both bond and equity markets have continued to struggle in 2022. June was an exceptionally weak month, as a higher-than-expected US inflation print led to risk assets selling off due to fears that inflation had yet to peak and that central banks would be challenged to bring it back down more quickly.
When is the next pivotal point?
At the time of writing (09/07/22), equity markets have staged something of a comeback. Still, much of this optimistic rebound is based on the deteriorating economic data, which leads to a reversal of the reasons for the falls in June. In the simplest terms, bad economic news can be good news for markets. This might appear to be a ridiculous state of affairs if taken at face value, but it really boils down to this; central bank policies have been leading the markets by the nose ever since the global financial crisis.
If the Fed (US), ECB (Europe), BoE (UK) and a bunch of others around the globe are given an opportunity to reverse the interest rates they have now promised to make, they will jump at it. The Fed famously pivoted in the final quarter of 2018 when it abandoned its interest rate rising policy, and markets rallied strongly throughout 2019. What many investors are now trying to work out is: when, and what, the next pivotal point will be?
An investor could be forgiven for thinking that all assets have fallen equally in recent months, but this is not the case. We have written several times about China being in a different place in the economic cycle and with a very different monetary backdrop.
Since their government made the first announcement on the 15th of March 2022, that they are probably nearing the end of their regulatory crackdown on some of their industries, a broad index of Chinese assets is up over 26%. Over the same period, the US is flat, and the UK and Europe have made small negative returns. The divergence in both central bank and government policy, as well as investor returns, makes geographical allocation so important. We don’t feel the assets that have shone over the last decade will necessarily repeat their feats during the next.
Crisis is currently one of the most overused words in the English language. Still, the word is appropriate when we talk about the current energy debacle engulfing much of the globe, and Europe in particular.
There are no quick fixes to years of poor investment choices, but one thing economists famously struggle with is being able to model human ingenuity. This ingenuity gives us grounds for optimism. The newfound acceptance by Europe that nuclear should be part of the solution is a significant step forward, but the impact of building new reactors will take time.
The energy crisis will also accelerate the reversal of some elements of globalisation that the pandemic had already started. This will lead to new supply chains more broadly and create new winners and losers across the globe.
The most immediately obvious impact of Putin’s war and the energy crisis is spiralling inflation. We appear to be in the foothills of a re-run of some of the (literally) darker moments of the 1970s. Again, we would point out that not all countries are in the same economic boat.
As well as China, many emerging market countries export natural resources that can benefit from the suffering in other, more developed, parts of the world. In an era that could be loosely termed one of deglobalisation, it is becoming increasingly important to look at investments outside of the winners in the period where globalisation was peaking and the world ran on a ‘just in time’ level of inventory. We have entered a period of prolonged change and a higher degree of uncertainty, but as ever, this will bring new opportunities.
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