Expert: Jasmine Yeo Facilitator: Don Wild
Headlines:
- The economic and political world, especially the UK, is causing market turbulence which demands a strategic investment response.
- The end of QE is signalling a new era of investment uncertainty.
- The days of 60/40 allocations are over, the key to investment success is to be nimble across an array of asset classes
Context:
New world of economic and political instability
The war in Ukraine, rising political power of China, weaker and more isolationist US, an energy squeeze, high inflation and interest rate environment, UK government being out of step with the Bank of England and that poorly market reaction to the now infamous mini budget (at the time of the roundtable Liz Truss was still PM).
Western Central Bank forecasting has been terrible, and has consistently underestimated the long-term nature of inflation pressures exacerbated by energy security concerns and the fragility of global supply chains.
The US may view the Russia/Ukraine conflict is a proxy for China/Taiwan, if China were to invade Taiwan that would likely involve US miliary intervention.
This feels like a post WWII not 1970s inflationary period
The combination of long-term nature of higher inflation and increasing future volatility of inflation rates makes it hard to build a fiscal and monetary policy and these circumstances feel more like post WW II than the 1970s high inflation.
Inflation reduces the debt burden and inflationary salary increases may improve social equality between the asset rich wealthy and the working poor.
US growth technology company values are falling as QE ends and liquidity dries up.
We hear less about the impact of ending the post 2008 QE stimulus because it is too complex for most market analysts to understand or to model confidently its implications on stock market values and interest rates.
The EU may struggle more than the UK with high inflation
The EU will struggle to deal with inflation across its different domestic economies and there is no single policy solution to deal with inflation simultaneously at 6% in France and 25% in Estonia.
Food and fuel inflation may also stimulate social and political unrest so we may see regime change across Europe and maybe a return to far-right extremes (e.g., recent Italian election)
Key takeaways:
- The key to investment success in a turbulent world is to be nimble across an array of asset classes
- When inflation exceeds 2.5% investors should look at long term inflationary bonds as an alternative to equities
- Energy is a huge and fast-growing sector with increasing asset allocation – this is an investment opportunity sector
