Reasons for optimism...

Market report

• US Federal Reserve raised base rates for the first time in this economic cycle, whilst the Bank of England’s Monetary Policy Committee opted for its third consecutive interest rate rise
• Stocks were buoyed in the week by China’s robust moves to backstop risk-appetite domestically and renewed hopes for de-escalation in Ukraine. Commodity prices and safe-haven bonds retreated
• Stagflation, recession, and a return to the 1970s remain common client concerns at the moment

CIO view

Clinton Baptiste

A keynote speaker at a conference I attended this week intriguingly began his session telling the audience he knew exactly what was going to happen. His qualifications, he breezily continued, were that he had predicted Brexit, the Great Financial Crisis, the Pandemic and, of course, the war in Ukraine. Inevitably the future he ‘saw’ was not bright. This geopolitical clairvoyant’s, no doubt patented, technique of unpacking the hidden super trends within the planet’s history pointed to gold, tinned food, and shotguns as the only viable investments in the decades ahead. All of this was supported with some hastily surfed charts covering millennia of mistakenly described history.

Unfortunately, there was no rotten fruit provided. Nonetheless, several points sprang to mind that I thought important – you may disagree.

First, we are in the midst of another terrifying, tragic, and confusing time on this planet. War, disease, and more besides. At such times, we are particularly vulnerable to the reassuring (over)confidence of the soothsaying community. All these sages begin their prattle with a list of major horrors they predicted ahead of time. It’s almost impossible to resist the urge to listen – perhaps this really is the middle-aged man who can shine a bit of much needed light on the pitch black path ahead? Sadly, no such individuals exist. If they did, why would they be wasting their time talking to low-lifes like me? Surely the world’s policymakers would be camped in their garden, pleading for some crumbs of his omniscient wisdom? Or maybe the world’s policymakers wouldn’t be able to get within 100 miles of the giant fortress estate this individual would have assembled from actually putting his money where his mouth is.

Second, history can be a very dangerous tool in the hands of the breathtakingly cynical. We are inveterate pattern spotters (who really thinks that collection of stars looks like a plough?). This can lead us astray when viewing long stretches of history. The more glib historians will play to this weakness; it can be exhilarating to experience the leaps and connections they authoritatively trace for you. However, more often than not, such theories wilt on closer inspection. The causes of the various events creating headlines today do often have deep historical tentacles. However, that should not be mistaken as making what comes next any more predictable. There are, as ever, a range of potential outcomes from this point. Some are inevitably darker. There is no requirement for humanity to continue to build on the stunning progress made in the last few hundred years.

For what it’s worth, my personal belief, based on a close and continuing study of history alongside a perhaps innate optimism (a bias in itself of course) is that we are at the beginning of this take-off, not the end. There are many potential mis-steps along the way and the destructive power we now possess is rightly a source of alarm. However, much of the progress we’ve made since the enlightenment is likely harder to fully retrace than some argue.

Central Banks

This was also a week that saw central bankers back in the fray. The action was much as had been telegraphed. Both the Bank of England and the US Federal Reserve added 25 basis points to short-term borrowing costs. There were nonetheless some surprises as both central banks tried to fine-tune expectations of what is still to come in the months ahead.

We obviously need to be a bit careful here. Even before the tragedy of Ukraine, the forces pushing and pulling the global economy were already epic. The waning of historic levels of government support in the US versus a global consumer unevenly equipped with huge reserves of savings and rapidly recovering labour markets. Eye-watering levels of inflation are certainly sapping some of that potential consumer pep, but the world economy went into this crisis enjoying considerable momentum from a number of perspectives.

It is a well-known ‘dirty secret’ amongst central bankers that there remains significant doubt about how inflation expectations are set. They are certainly not easily measured. Nonetheless, the signs that consumers and businesses are worrying about their respective central banks’ appetite to keep inflation low are so far not especially convincing (this is less the case in the UK). However, central bankers in the US and UK and surely right to be taking their foot off the accelerator, even in the face of the uncertainty surrounding Ukraine’s effects on inflation and confidence.

Nervous investors

Investors are understandably jittery in amongst all of this. Measured investor sentiment remains depressed, even after this week’s recovery in risk-appetite in parts of the world. China’s policymakers sparked a giant rally, from very depressed levels, in certain Chinese stocks. European equities have similarly bounced off lows as negotiations between Ukraine and Russia continue. Real bond yields have surged, many commodity prices have almost returned to where they were previous to the Ukraine crisis. These are dizzying times to be watching the world reflected in capital markets’ prices.

Take a step back is the best advice here. Investing now may feel like throwing your savings into a giant lottery machine run by a cackling maniac. However, the long history of capital markets presents a very different impression. Viewed over a period of years, not days, one begins to see the pattern of accumulating gains backed by the ever-greater innovative feats of our amazing species, combined with their spreading application. Of course, there is no guarantee that this will continue. History does not provide guarantees about the future, only hints.

For those thinking about the need to beat inflation with their savings over the longer term, the key questions here are not about the Ukraine or the authoritarian axis apparently developing or even what the pandemic still has in store for us. It is whether you think humankind is done with inventing new stuff and getting better at using it. That seems highly unlikely to us in the context of that rapidly growing store of explanatory knowledge that humanity continues to build. The pay-out from this knowledge mountain has ever been uncertain in timing. However, investing in a diversified batch of capital markets investments is an act of faith that there is more to come over time.

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