Expert: Ian Cunningham, Ninety One. Facilitator: Andrew Mills
Headlines:
- Chinese policy pivots again
- Is the Fed playing catch up?
- Ukraine & Russia: Still early days
- Finding value in the 2020s
Context:
Chinese policy:
Chinese policy makers pursued orthodox economic stimuli during and after the initial shock of Covid. In contrast, 2021 was characterised by a notable tightening of policy. The year also saw interventions aimed at addressing structural imbalances ranging from monopolies to the real estate market. Taken together, these actions weighed heavily on Asian asset prices throughout the year.
However, December 2021 saw the PBOC pivot its posture. This opened the door for an easing of monetary policy, something made easier by relatively well-controlled inflation. Greater stability appears to be the priority for 2022, illustrated by the supportive comments of key policy makers in the wake of February’s market sell-off. Overall, Asian risk assets look much more favourably positioned now than in early 2021.
The Fed:
The last two years have seen an overall increase of nearly 40% in the US’ money supply. The effects of this are easy to see. Consumer spending is running about 20% above the long-term trend and labour markets are tightening fast. Employment rates are back at pre-covid levels and vacancies exceeding job seekers by nearly two to one.
What should we expect from the Fed over the next 12-18 months? Faced with fast-rising prices and wages, the Fed has stopped printing money and recently announced one of an anticipated series of rate rises. Even so, monetary policy remains very stimulative. Bank balance sheets are strongly capitalised too, suggesting strong scope for increased lending. The US economy is gaining steam and it seems likely that the Fed may find itself needing to hike harder than currently expected.
Ukraine & Russia:
Russia’s invasion of Ukraine is amplifying headwinds for the global economy. Rising energy prices and supply chain disruption are pushing inflation higher and creating a negative growth impulse.
It’s very hard to know whether markets have fully priced in the risks of this crisis. The conflict is inherently unpredictable and is triggering mass migration, along with a realignment of global geo-political relationships. Russia’s partial isolation from the global economy will also be far-reaching. Key global industries could yet be impacted by interruptions to the supply of vital, specialised commodities such as neon and palladium.
Finding value in the 2020s:
A backdrop of excess central bank liquidity has flattened the prospective returns of most asset classes in recent years. But the coming decade will be very different from the last. The threat of stagflation is growing and there is increasing potential for costly policy mistakes by central banks. Research by Ninety One suggests that a balanced 60/40 portfolio of global equities and government bonds will deliver just 2.3% over the coming decade.
Added to this, the monetary policy outlook is increasingly uncertain with the US and China looking poised to begin moving in opposite directions. This uncertainty, compounded by growing geo-political tensions, leaves many investors wary of debt and embracing a combination of cash and equities. Regional prospects for equities look varied too, with Asian valuations relatively depressed at a time when US forward earnings multiples appear stretched.
Key Takeaways:
- The world likely faces a decade of higher inflation, and of much more frequent and unpredictable policy interventions from rate-setters and governments. This is set against a geo-political background that looks less certain than it has been for decades. In the circumstances, classic buy and hold investment strategies are likely to face increasing challenge. There is value to be found, but simple directional bets are highly unlikely to deliver reliable returns
- Investors should respond by tracking policy carefully and following liquidity closely. Greater flexibility, focus and selectivity will be essential. A willingness to park cash before redeploying could be valuable. Like it or not, we must all learn to live with greater uncertainty
