Expert: Richard Clarke Facilitator: Jasmine Yeo, Ruffer
Headlines:
- This new world of economic and political instability, especially in the UK, is causing market turbulence which demands a strategic investment response
- This feels like a post WWII, not 1970s, inflationary period
- The end of QE is signalling a new era of investment uncertainty
- Inflation reduces the debt burden, while 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
- The EU may struggle more than the UK with high inflation
Context:
We are in a new world of economic and political instability caused by the war in Ukraine, rising political power of China, weaker and more isolationist US, the energy squeeze, high inflation and interest rate environment, a UK government out of step with the Bank of England and that 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/Urine conflict is a proxy for China/Taiwan - if China were to invade Taiwan that would likely involve US miliary intervention.
A combination of the 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 1970’s high inflation.
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 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 next steps include looking at areas for investment in turbulent world
- The days of 60/40 allocations are over, the key to investment success 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
