At this time of year you usually reflect on the past twelve months, however I’d prefer to look ahead at the challenges and opportunities that we see in investment markets. There are always things to worry about; we’ve had plenty in the last decade such as the European sovereign debt crisis, trade wars, Brexit, conflicts in Ukraine, Syria and Afghanistan, US government elections, shutdowns and debt downgrades, the start, finish and restart of quantitative easing and finally the Covid-19 pandemic (and Zika, Ebola and H1N1). There are always plenty of reasons to be fearful and now is no different, just read BBC News or the FT and you’ll be feeling like scrooge in no-time. Despite all of the gloom, I’m an optimist and prefer to look for opportunities when others are panicking, however now more than ever you need to be picky.
Markets have been very strong in their recovery from the onset of the pandemic, last March, and it doesn’t really matter what you’ve owned in the last 18 months. You’ve likely made some good money as long as it’s not cash. I think that the gravy-train of just owning anything has come to a close. Over the next few years there are areas of huge potential and also huge downside risk. I read a piece from Goldman Sachs recently titled ‘Transition, Transformation, Transmission; Accelerating pace of adoption and disruption’, which sums up some of the opportunity and concern. Many industries are undergoing huge disruption, such as energy, transportation, banking, retail and healthcare, which will create winners and losers, therefore owning a passive strategy, which owns everything, might not yield the same results as it has done in the recent past. If you are positioned in the right areas of adoption and disruption, you’ll do very well in the next few years.
Finance is changing too with sustainability becoming a factor in the price and availability of funding. We’re seeing a change in the willingness of investors and corporations to invest and fund companies and sectors that are seen to be damaging to the environment or society, which is resulting in rising financing costs. Likewise, those companies and sectors that are seen to be providing a positive change to the environment, or society, are seeing falling financing costs. The conversation has gone from ‘at what price would you lend to a tobacco company?’ to ‘will you lend to a tobacco company?’
One risk that we continually talk about is inflation and it’s the biggest financial risk that most of us will face in our lifetime. It’s why the majority of our portfolios are benchmarked against inflation. Risk is not achieving your aims, and keeping or improving your standard of living is a common aim. Inflation has been consistently higher than the Bank of England Bank Rate over the last decade and I’m pretty sure that’ll be the same for the next decade, which eats away at the value of cash-based investments. The Bank of England issued its Monetary Policy Report in November saying that ‘inflation is projected to peak at around 5% in April 2022’. In November, actual CPI hit 5.1%. We’ve been saying for a while that inflation could be higher and stickier than expectations, therefore, it’s essential that you understand the impact that inflation could have on your assets.
Despite the continued disruption and uncertainty that the Covid-19 pandemic brings, I continue to be optimistic for the future.
I hope that you have a happy and healthy Christmas, and that the New Year is a positive and prosperous one.
Thanks for reading and