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Seven from 7

7 min read
Ben Kumar, Head of Equity Strategy20 Jan 2021

While we enjoy writing thought-provoking, deep-dive pieces, every so often we think that a bit of straight-shooting is called for.

So once a quarter, we try to give you our unfiltered answers to the questions we’re being asked at that moment.

How does the world deal with all of the debt built up by the COVID-19 related stimulus?

First, governments don’t have any desire to deal with the problem right now. At the moment, they are still in stimulus mode, making sure their economies survive the COVID-19 damage. And once the stimulus is over, they won’t move straight into debt-reducing mode – the lesson of the Global Financial Crisis was that austerity doesn’t win votes, and only solves the problem very slowly.

So most governments are pushing the problem out, hoping that a decent period of growth can make the problem easier to solve (and also, cynically, hoping that they might not be in power when the time comes to solve it).

Sometimes, bond markets make governments move, even when they don’t want to. But we don’t believe that global investors are going to force the issue. This is a global problem, and there’s nowhere else to go; every ‘safe-haven’ country – US, Eurozone, Japan, UK – is in the same boat, all having increased their borrowing substantially in the past year. So a bond yield spike is extremely unlikely; bond investors are in the same boat as everyone else.

Is inflation going to be coming back in a big way in the next few years?

It all depends what you mean by ‘big’.

There is almost no chance that we’re going to see 1970’s style inflation of more than 20% - the conditions just aren’t there today. Firstly, oil is no longer so valuable. Between 1973 and 1974, Organization of the Petroleum Exporting Countries (OPEC) nations launched an embargo against the US and its allies, and the price of oil quadrupled. Now though, OPEC isn’t the monopolistic force it used to be. Lots of the big oil-producing nations aren’t in the club – the US, Canada and China. So a similar oil price shock (upwards at least) is extremely unlikely.

Secondly, the power of unions (in the UK at least) to negotiate wage rises is similarly diminished – removing the other major cause of the inflation cycle in the ‘70’s. And thirdly, we’re still in a recession. There are no excesses building up in the system.

But even though double digit inflation is unlikely, we do expect inflation to become more of a factor than it has been. Unlike the last decade, inflation is more likely than not to be around the 2% target that central banks set. That’s still enough inflation to impact the value of a portfolio though – over 20 years, inflation at 2% would cut your spending power by one-third. It’s worth thinking about how to deal with that… (as a clue, part of our answer involves multi asset investment solutions).

After four years of Donald Trump, what happens now in the US?

Politics don’t matter for markets as much as many people think. While the differences between the Republicans and Democrats may look huge, in reality both parties are firmly pro-capitalist and pro-market. Both parties promote the idea of the ‘American Dream’, which leads to the consumption, innovation and creative destruction that powers US growth. That won’t change.

The most obvious changes are going to be in environmental policy – but this will simply realign the US with the direction it was going in before Donald Trump took office. It’s an important signal, but the economic momentum is heading that way anyway.

The other key aspect to think about is the relationship between the US and China. While the Biden administration may take a more… subtle… approach to the problem, and will maintain the pressure on China, there is no escaping geopolitical realities. China’s growing economic and political power is a more important issue than who is in the White House.

How has COVID-19 impacted the outlook for inequality, and what does that mean in the future?

Inequality is getting worse.

The pandemic benefitted the 1% far more than anyone else as the rise in financial assets padded large bank balances and stock holdings even further. And in fact, middle-class occupations (with the exception of the arts) also tend to have weathered the COVID storm reasonably well. Home schooling while trying to work isn’t an ideal situation, but it’s better than the alternative of not working at all.

Many of the people who have lost jobs in the pandemic are poor and unskilled. It may be some time before they get back to work – long enough to raise the number of people, across the world, living in poverty. So it’s not just that the rich are getting richer, it’s also that the number of people getting poorer is rising too.

The impact will only start to be seen long after we exit crisis mode – once the virus has been defeated. Think a few years’ time. It might not be pretty.

Are active managers going to be able to continue outperforming passive indices? Is active back?

Yes. After four and a half years of underperforming passive indices, active managers have kicked into life. COVID-19 reminded investors that what a company does actually matters, as does the way in which it does it. The difference between good and bad companies is becoming clear; business models which haven’t been fit for purpose for some time are seeing the shakeout that was needed to prove the stock-pickers right.

We believe that this will serve as a reminder to investors that there are great investors out there, who over the long term, should be able to beat the index after costs.

It’s been notable too, how quickly active managers have recovered the four years of underperformance, delivering staggering returns in the space of nine months. We believe that this will serve as a reminder to investors that there are great investors out there, who over the long term, should be able to beat the index after costs. We’ll give our active managers the time to do that – and hope to reap the rewards.

Should investors be taking Bitcoin (and crypto-currency) seriously?

Bluntly, no.

Not as a part of a genuine, long-term multi asset portfolio.

We tend to get this question mainly when the news is full of stories of crypto-millionaires. Bitcoin – and indeed all crypto-currency – may well be a new asset class, with its own risk and return characteristics. But it will take a long time before the evidence is conclusive one way or the other; the most recent ‘new’ asset class to become mainstream was probably the joint-stock company back in the 1600’s. Bitcoin, by comparison, is about 12 years old. We need a lot more data than that before we even begin to think about it strategically as an investable asset.

That doesn’t mean we’re not watching it (it’s hard to miss some of the daily price movements!). It may be that crypto-currency really does have staying power. We’ll always keep an open mind about the assets we use to build our portfolios – but the hurdle for serious consideration is very high.

Is COVID-19 still the biggest risk in 2021?

Vaccines change the game. Previously, lockdowns were the only tool we had to control the virus. Now, they are a means to an end – giving health services enough time to deliver vaccines. And while there are still lots of obstacles to widespread vaccination, they are ones that the world is used to solving – delivery and manufacturing.

So no, we don’t think that COVID-19 is the biggest risk in the coming twelve months. It’s not going to vanish overnight, but its dominance of the news cycle should start to fade.

The obvious question is –“What will replace it?” Our view is that most of the time, there aren’t all-encompassing global risks. There are nuances, with different things playing out in different regions and sectors. For example, the technology sector will have to deliver on stratospheric earnings expectations, while other businesses try to decide whether high street shops have a place any more. So we’ll keep an eye on lots of little waves, rather than looking for a tsunami.

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