Global Markets to 21 May 2021
- IQ news
- 2030? We’re already thinking about it
- When things get bumpy… do nothing!
- Inflation: it’s back… …
- but it’s not all bad
- Innovation saves the day
On Wednesday evening last week, the entire Investment Quorum staff shuffled and wheezed their way through the City in their plimsolls and sweatbands – all to raise money for Papyrus, the excellent charity we are supporting that is dedicated to preventing suicide among young people.
One of the “competitors” in the race was our Chief Investment Officer Peter Lowman who is now recuperating, but overjoyed at having become a grandfather to Sienna Rose Lowman. The entire IQ team sends its warmest congratulations to Peter and his family.
2030? We’re already thinking about it
2030 may seem a long way off, but our investment process involves focusing on long-term asset allocations, themes and innovations that we believe will deliver a satisfactory risk-adjusted return for our clients over time. The markets have had to whether many financial storms over the decades… the most recent being a pandemic. Many financial studies agree that a severe asset price drop in capital markets can cause behavioural panic, leading to capital loss and liquidity issues, and ultimately to bankruptcies and insolvencies.
When things get bumpy… do nothing!
It may be tempting to liquidate your portfolio during a stock market crisis. But time and again, history has told us that it is completely the wrong thing to do The best course of action is not to panic. In fact… do nothing. Take a step back, assess and reassess the situation, reconsider your appetite for risk and your time horizons… and then (and only then) act accordingly.
Professional long-term investors know that financial markets and economies invariably recover over time. So the best thing to do is simply to reposition your portfolio based on the event in question. Take the last two major crises: the Global Financial Crisis, and then more recently, the 2020 pandemic. Both times, the financial markets plummeted. They then bottomed out and eventually recovered to their former levels. Indeed in some cases, new all-time highs were seen.
Knowing what to do and how to behave when financial markets crash is essential. And it’s important to bear in mind that these crisis points can often force change, creating investment opportunities in the process. Look at the pandemic, for example. Innovative laboratory technology has been leveraged to develop a vaccine in under a year. When you consider that the previous record for fast-tracking the development of a vaccine was set in 1967 (when the mumps vaccine was developed in four years), that gives you some idea of what a breakthrough this is.
If the global economy is able to mend and recover, it is – in no small part – down to rollout of numerous Covid-19 vaccines across the world. Central banks are evaluating their monetary policies and governments are easing their lockdown restrictions, giving businesses and consumers an opportunity to return to something resembling normality.
Inflation: it’s back…
These developments are creating other types of turbulence in the markets as well: people are suddenly talking less about the pandemic, and more about higher inflation. With economists still trying to determine what will happen to inflation over the next few years – and what it might do to central bank policy – it is no wonder that we have seen a strong rotation in favour of cyclical value stocks and out of growth that has given investors excellent returns over the past decade.
In the UK, the annual inflation rate more than doubled in April, boosted by rising energy and clothing costs. However, the jump to 1.5% is still below the 2.0% target set by the Bank of England. Nevertheless, even the slightest hint of higher inflationary pressures or the prospect of the Federal Reserve Bank reducing its assistance will create sell-offs in riskier assets or a rotation into those deemed to be safe-haven ones.
Back in May 2013, when the post-financial crisis recovery was well under way, the Fed hinted that it might begin to taper its bond buying programme. This led to the taper tantrum bond sell-off and a subsequent pullback in equity markets. In actual fact, the Fed did nothing and stock markets rallied for the rest of that year.
There was a time when governments actually feared inflation. But things have changed in recent times. Indeed, President Biden is now ushering in a new post-pandemic era: he has even appointed Vice President Kamala Harris to oversee a new task force charged with getting wages up. Previously, the policy was to try and keep wage growth down.
The reality is that the markets have already priced in higher inflation. And in time, they will do the same for interest rates. Monetary tightening is inevitable, and in certain countries such as Canada and the UK, the central banks have already announced tapers to their bond buying programmes – despite what the US is doing.
Higher levels of global debt and a plethora of unstable companies will complicate matters going forward. In the meantime, investors will allocate capital accordingly, trying to second-guess what the stock market might do against a backdrop of higher interest rates, inflation, financial repression and fiscal dominance.
… but it’s not all bad
So although people are nervously focusing on higher inflation rates, dwelling on how it has a tendency to erode purchasing power and the value of cash… it’s worth remembering that mild inflation does have its benefits: it removes the risk of deflation and it boosts economic growth potential – global consumers become apprehensive about prices rising, and so they stop postponing any spending decisions and make whatever purchases they are considering now.
Innovation saves the day
We mentioned innovation as one of the factors featuring in our investment process. Innovation enables organisations to remain relevant in a competitive market. It has a huge impact on so many aspects of society – everything from economic growth, well-being, communication and education to accessibility and environmental sustainability.
While Covid-19 continues to devastate parts of the global economy, innovation continues to improve the way in which businesses and industries work, helping them to find new ways to sell, service and operate in a crisis. Even those businesses and sectors that have been worst-hit by the pandemic are beginning to focus on a more innovation-driven future.
Digital technologies have been incorporated into business practices across the board. Innovation and disruption now figure prominently across the whole business landscape, and are likely to create some exceptional investment opportunities in the coming decades. But for investors to be able to benefit from them, it is very important not to panic at times such as these when the economic cycle changes course and the investment landscape tilts.
The stock markets are always irrational. So trying to predict them is an exercise in futility. Which leads me nicely to one of Warren Buffett’s famous maxims: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” Remember – when markets become difficult, replace negative thoughts with positive ones. Then you’ll start seeing positive results.
We would therefore see any significant pullback in the markets over the coming weeks as a buying opportunity: the global economic recovery has only just begun and so many company share prices are likely to rise further throughout the year.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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