A change of regime...

Market Report

The investor in-tray remains cluttered to say the least. This week all eyes were on an eventually peaceful transition of power in the US, the brief spasm of political risk in Italy, and a raft of fresh data on the state of the global economy. Stock markets have remained resilient in the face of concerns over new strains of the virus and the mounting global death toll. This resilience seems to be founded on expectations of more US stimulus in the pipeline as well as the accelerating vaccination programme.

CIO Report 

As we look to the rest of the year, the starting point is one of extremes. Real interest rates persist at rarely seen lows potentially helping to prop up some parts of the equity market sitting at rarely seen highs in valuation terms. Set against this, the world’s investors can be (very loosely) grouped into two camps. The first camp are those who see this year and the years ahead as a continuation of the recent past – growth and inflation will continue to disappoint, central bankers will continue to sit on interest rates. The now pricey winners of the last decade can continue to bring home the investment bacon. The other camp sees this crisis as a likely inflection point for the global economy. The remarkably muscular response from governments around the world, combined with likely increased costs of production, sees inflation start to surprise positively in coming years. Real interest rates start to retrace their march lower as a result. The investment toolkit required for this brave new world could be utterly different from the palette of winners that have dominated the last decade. Some of the most out-of-favour ‘value’ segments of the market, for years missing catalysts to drive a narrowing of the valuation gap to the more fashionable market environs, could begin to recover lost ground. Gold and bitcoin may begin to behave like the flightless birds they resemble.

For our part, exclusively betting on one side of the argument smacks of hubris. The organising principle behind our multi-asset class funds and portfolios is a humility about the detail of the future. The near term economic outlook is as complicated as we can remember. As the various vaccination programmes shield an ever greater part of the population, the apparently more transmissible strains of the latest coronavirus are reminding us daily of what we need shielding from. Large chunks of the global economy remain necessarily comatose, unlikely to be roused for months yet. However, a new consensus on national debt, enabled by those very low interest rates, is providing welcome dry powder for governments desperately trying to plug the holes punched by the pandemic. 

With the help of those vaccination programmes, most expect the world economy to return to pre-crisis levels sometime in the second half of the year. However, we should not confuse GDP parity with any conceptions of pre-pandemic normality. The world, society, the outlook, are likely starkly different to what they were or would have been. Those who would try to colour in this new normal using the aftermath of past pandemics for inspiration will likely be frustrated. The reality is that there is no close analogue to our current situation. 

The changing of the guard in the US will surely matter. However, keep an open mind as to how. Much of the best informed editorial ink spilled in the aftermath of the last three regime changes was mostly well wide of the mark with the benefit of hindsight. There are many lessons from President Trump’s time in office, but one of them is surely a reminder of the importance of ‘events’ in shaping a Presidency rather than the other way around. The political calendar certainly doesn’t look as threatening as many recent years – German and Dutch elections look set to deliver continuity rather than ideological upheaval. However, Italy’s fresh political spasms this week are both a reminder against complacency as well as the limitations of a calendar-based approach to risk identification. For markets and investors, the most potent risks (both positive and negative) are those that come without warning from diaries or other sources.

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