The years that lie ahead - June 2021 update

In a recent update with a market analyst, one of the things that we all seem to be grappling with is overwhelming amounts of white noise. We have had exposure to many of the great (and not so great) economists, and one thing is clear we are slowly emerging from a man-made recession. It also seems that as we come out of this recession, people are already talking about the next!

People are mainly talking about whether inflation is spiralling out of control, when interest rates will rise, has the consumer spending boom in the US come to an end, when will next the wave hit, etc. It is easy to get consumed by this, but you must remove yourself from the noise and look deeper.

The point is this; there will be a recession, there always will be the threat of one, but the question is when? For a recession to happen two crucial areas to watch are rising interest rates over a prolonged period and rising debt ratios (debt vs assets). Currently interest rates are at all-time lows, and debt ratios also remain low. So, we may not see a recession for several years, if these 2 metrics do not change drastically.

If we assume interest rates go up in 2023, then we could guess at a recession in 2025, which is four years away! There are some (including us) who believe they may not start rising until 2025 which could see a recession in 2027 or beyond.

During this time there will be wobbles in the market, which is normal behaviour. There will also be concerns over inflation and lots of other noise. Crucially, when we listen to the great (and not so great) economists, we can get a better feel for what is happening today, and there are things that we need to understand. It is however important to step back and apply objectivity.

With all of this in mind, we have collated below some of the salient points raised over the last few weeks:

GAM – the world in 2021

With the debate on whether technology has run its course, some snippets to consider:

Technology is about driving business models, and this covers almost every sector of the market
Europe may be seen as weak in terms of pure technology, but it is involved in some of the disruptive technologies especially leading the way in renewable energy and semi-conductors
The pace of change is vast; it took 68 years for 50 million Americans to fly on planes, it took just 19 days for 50 million Americans to sign up to Pokémon Go
“Growth” businesses seem expensive but are capital light and can re-invest vast sums back into the business, “value” businesses tend to be capital intensive businesses and often have capital invested in the wrong place

Artemis – Global Fund Manager

In an update with the manager of their global strategy we touched on the question of ESG (Environmental, Social, and Corporate Governance). This is not an ESG fund but some important points to note:

When investing you need to invest in those companies which are taking ESG seriously, because there are indirect implications for companies who do not. For example, increasingly banks are less willing to finance those who do not engage
It is important that funds like this do invest in the old economy because if everyone walks away who will make these companies change
The key take away is not to fight ESG too hard because that has implications

Hermes – Responsible Investing

We know this is a “hot” topic, and good to share some thoughts:

This is not new; it started in the 1800s with religious groups setting exclusionary investments
Gradually it has moved towards mainstream with $663bn invested in 2016 to $1.6tn in 2020 globally
Growth has been driven by European asset owners, waves of regulation, evidence that ESG enhances performance, and greater knowledge on the impact of client change, as examples
Companies are starting to understand that they must change, as failure to do so will damage their reputation and ultimately can destroy them
Companies that engage will find it easier to raise additional capital, they can see that good practices improve operational performance and there is evidence that stock market performance improves

JP Morgan – Market Watch

Looking at the markets:

The upside is that inflation is not a worry in the US due to supply issues. But they are worried about the shelter part (housing) of the inflation figures – this is something to watch
Another short-term concern is wage pressures both in the US and UK, where the hospitality sector is finding it hard to recruit
Although the Eurozone has been behind the curve it is now playing catch-up in terms of vaccinations and PMI data is now above 50%
We should not underestimate the scale of the EU recovery grant – Italy and Spain received the equivalent of over 5% of GDP, and for Greece it equates to 11%. The benefit of these grants is not likely to be felt until 2023 or 2024 meaning the global recovery has a longer road
Europe is on the right side of the next decade – such as electrification of vehicles (VW will sell more electric vehicles than Tesla this year), they have global leading renewable energy businesses, and they are leaders in semi-conductors

BMO – Market Update

Turning to the markets:

The UK has seen an amazing turnaround with a 98% decline in hospital admissions since January – the vaccine and lockdown programme seem to be working
Concern is for the US where the vaccine programme is slowing with fewer people now taking up the jab. To compare 85% of over 65s have had the jab, in the UK this is 95% and growing. So, autumn could be a problem for the US
They believe inflation worries are transitory, and elements of the inflationary basket are temporary due to supply constraints and will drop back
Concerns over emerging market with India and Brazil a worry due to rising infection rates. Rising interest rates in emerging markets will also slow growth and many countries are unlikely to get vaccinated until 2024
They think the UK is facing a boom time helped by the vaccination programme, helped by plans for boosters etc. Also, UK GDP figures have not been revised and they expect these to jump, the levels of savings are expected to help in the boom and the unemployment levels are not expected to be as bad as suggested. In fact, there are shortages of labour in some areas

Jupiter Market Update

Some of the key points include:

They believe there will be significant economic growth across the world, areas that they look at include credit card data and public transport usage
Areas of opportunities include Japan and Europe
We should expect massive GDP figures in 2021 but remember these are coming from a point of zero or worse!
We should not ignore the money being pumped into the economies in the US and Europe
Expect the lines between central banks and governments to be blurred especially as economies look to fund the shift to green economies
Inflation is being pushed up by supply issues, but this is transitory
One risk to consider is the Fed wanting zero unemployment; by its nature this creates wage inflation

Henderson – Market Update

Not everyone is positive!

They expect upside global growth upside over the next 12-18 months but beyond that expect a slow down
They feel PMI data has peaked and this will start to decline
They feel there is high possibility of a hard landing in China as they overdo constraints on the economy
They think the consumer boom is over in the US and what was due to be spent has been spent and therefore we should expect a slow down
In summary, they feel the next downturn will be in 2022

Aberdeen – China

China dominates much of the news, so there are interesting points here:

Concerns of slower growth in Q1, but the Lunar New Year played a large part of this, which should change in the next quarter
There are concerns around demographics, but they argue that the focus should reflect that the quality of labour is improving, and this will offset the quantity, so effectively younger and more educated people are replacing older and less educated
Concerns around conflicts with the likes of Taiwan will arise, but China knows they will be cut off from international markets and would they want to do this
In terms of regulation, it is worth remembering that they want to strengthen the economy, consider supply side reform and shadow banking reform. The digital economy is the next step looking at consumer protection, sustainable high-quality growth, and risk management
Opportunities centre around five areas – aspiration, digital future, health and wellness, wealth management and going green

Something extra

Below are additional interesting articles from the last few weeks:

Making Affordable Rental Housing Part of Europe’s Recovery

Monumental Victory’: Shell Oil Ordered To Limit Emissions In Historic Climate Court Case

Does deglobalisation make economies more resilient to recessions?

Fact Check: The Truth Behind Five ESG Myths

Investing Like Warren Buffett

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.