2022 through the eyes of Vincent van Gogh
Investment managers need to think like Vincent Van Gogh.
Not in every sense (two ears where possible, please), but certainly in the artistic one. Van Gogh’s most famous paintings walk the same line that any investor talking about the future must tread: they sit between total abstraction (I’m thinking of some of Picasso’s madder stuff) and complete precision (such as engineering blueprints).
Unfortunately, halfway through every December, the financial world forgets to paint like Vincent. Normal practice goes out of the window and people start talking in terms of calendar years and decimal points. All of a sudden, they are making exact forecasts of where the FTSE 100 or USDGBP will be in 380 days’ time.
For about two weeks, everyone pretends they’re an engineer, despite spending most of the year holding a paintbrush. And, as you’d expect, the output is useless. As in, not of any use – to the people making the statements, or the people reading them. False precision is ultimately just false.
At 7IM, we never forget that we’re painters. When we think and talk about the future, we’re aiming for the sort of detail Van Gogh gave us in The Starry Night. We don’t want to be so vague as to be useless, but we don’t need to pick out every individual star, or house, or tree.
You’ll note an obvious omission – no mention of COVID, and that’s deliberate. We’ll keep our eyes open in the short term, but over the timeframes we’re thinking about here, there’s no useful picture to be painted.
So, forget calendar years and crystal balls; instead enjoy our post-impressionist1 approach to what the future might hold for investors.
Inflation splits the generations
There’s an inflation battle brewing between the generations.
Anyone who was an adult through the seventies and eighties has a clear and visceral memory of high inflation and the stresses it can cause. But since the early nineties, high inflation hasn’t been a problem in the developed countries.
So, people born later than the mid-seventies don’t have that emotional connection to the phenomenon – it’s academic rather than real. Trust me, I’m one of those without that experience! And you can tell me as much as you like about the dangers and risks of high inflation, but you can’t make me feel it.
In the world of finance and economic policy, there’s going to be a shift over the next few years. We’re heading for a point where even 50-year-olds aren’t going to have really lived through inflation. The people in charge are changing from those who lived through an inflationary period, and those who didn’t. Rishi Sunak was born in 1980…
We’re not too worried about sustained levels of high inflation in the near-term – although extra-low interest rates still mean savers need to invest. But as the heads of central banks and governments shift over the next decade, we wouldn’t rule out a change in the inflationary environment.
Stop talking about “technology” companies
I bet you can’t list the five largest US information technology companies…
Did you go for Apple, Amazon, Facebook, Google, and Microsoft? Maybe Tesla snuck in? If so, you’re wrong, but not alone. Common perception of ‘tech’ companies differs from their technical classifications.
Facebook, Amazon and Google aren’t ‘information technology’ companies in the current way investors view the world. Facebook and Google are ‘communications services’ businesses, as are Netflix and Twitter. Amazon and Tesla are in the ‘consumer discretionary’ sector.
When these sector definitions were developed2 in 1999, the world was only just getting to grips with the potential of information technology – computing. Now though, technology is involved in pretty much every business going. Saying something is a tech company is not helpful. Is it a sales software company or a semiconductor manufacturer? A virtual healthcare provider or a financial payments system? A smartphone maker or a social network?
Talking generally about technology won’t cut it for much longer. The next decade might see the market sector disappear. Instead, it will be embedded at the heart of every other sector.
China; in or out?
For decades, the easy way to invest in China was to invest in developed market companies with a Chinese presence: luxury goods manufacturers, car-makers, or hardware providers, based in the US, or Germany, or Japan, but with a high proportion of Chinese revenues. That’s going to change.
We see a two-system world developing. As a US company you won’t be able to trade with China. As a Chinese company, you won’t be able to trade with the US. Anyone stuck in the middle will have to choose where to target their business model – serving two masters is unlikely to work.
Chinese manufacturing capabilities are now at, or beyond, developed market levels, and Chinese demand is shifting to domestic businesses (strongly guided by the government). The best access to 1.4 billion Chinese consumers is likely to be direct, through buying the onshore equity markets in Shanghai, Shenzhen and newly launched Beijing.
Risks are everywhere. Stock markets in China are less than twenty years old, still treated as a casino by many locals, and subject to wild swings. The government can wipe out whole industries with a statement, and legal protections are far from assured. Geopolitical belligerence and human rights issues add a further moral dilemma. Foreign investors will continue to feel powerless.
But we’re getting close to decision time. Embrace investing in China, for all its perils, or ignore the most significant economic force of the next two decades. This is not an easy choice. But avoiding short-term pain in Chinese equities is likely to be the big mistake in the long term. The world is changing, and we have to change with it.
That’s three pictures from our gallery of the future, which are shaping the way we think about portfolios for 2022 and beyond. We’ll keep painting and investing in this way – and we’ll always share our thoughts once they’re ready for display. Ultimately we think that, like most of Van Gogh’s landscapes, the future looks bright (if a little blurry).
1 I spent most of my life thinking that Van Gogh was an Impressionist, but then during a lockdown walk, I found a blue plaque on a house two roads away from me. It turns out that in 1873-1874, Van Gogh lived in Stockwell. I did some reading and discovered my mistake. Post-impressionist. It also explains why a local café is called Van Gogh, something which was a total mystery to me before!
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