Lowes Magazine Issue 120

INVESTMENT

Much Ado About… Quite a lot actually, says Senior Investment Analyst, Paul Milburn.

“To be, or not to be, that is the question.” (Hamlet) One threat to this would be if energy prices stayed higher for longer, although as we put pen to paper hopefully Russia is coming

AS WE HEAD TOWARDS THE END OF 2021 THERE remains a number of questions to be answered when it comes to the outlook for markets and the global economy. The latest growth projections from the Organisation for Economic Co-operation and Development (OECD) released in September suggest that the UK economy will grow 6.7% this year, fuelled by loose monetary policy such as very low interest rates, and fiscal policy, with governments appearing willing to spend to lend support. Whilst this figure is strong it should be placed in the context of the 9.8% contraction which we saw last year. Indeed, economic growth achieved to the end of June this year meant that the UK economy was still 4.4% smaller than at the end of 2019. The forecast growth of 5.2% for next year however, one of the strongest in developed countries, will go some way to putting the economy back onto the right path. For the US meanwhile the OECD forecast growth of 6% this year, with a more reserved yet positive figure of 3.9% in 2022. This follows a much shallower contraction of 3.4% in 2020. “We have seen better days.” (Timon of Athens)

to the rescue with regard to gas supply. Another threat would be if wage growth were to continue to rise for a prolonged period of time. Here in the UK the number of job vacancies has hit a new record of 1.1m, and with fewer unemployed people for each vacancy than before the pandemic, employers are having to offer higher wages to attract suitable candidates. “Uneasy lies the head that wears the crown.” (Henry IV) A more sustained period of higher inflation could be difficult to tackle for central banks if we see a continued slowdown in the economy. Whilst an interest rate rise or reduction in liquidity through the tapering of quantitative easing would help bring

inflation back in line, it could at the same time slow the economy further. This could potentially induce a phase known as stagflation, something which all central bank governors will be keen to avoid. “There is nothing either good or bad but thinking makes it so.” (Hamlet) And finally we have China. Trade wars having been put aside, for now, the authorities appear focussed internally and the transition to a more stable, domestically

As we moved through the third quarter however, we started to see economic momentum turn downwards. Whilst the high speed of recovery was unlikely to be maintained, the pace at which leading economic indicators are turning down has taken some by surprise. For example, in the US the Federal Reserve of Atlanta run a model called GDPNow. The is purely a quantitative

model which looks at different economic data sets to provide an indication for the current quarters’ growth, in this case the third quarter. On 30th of July the initial forecast was 6.1% on an annualised basis. By 2nd of September the forecast had slipped to 3.7% and as of 8th of October the figure stood at 1.3%. Whilst economic growth momentum shows signs of slowing, inflation and inflationary pressures continue to surprise to the upside. UK inflation is currently running at 3.2%, above the Bank of England’s set target of 2%. In his letter to the Chancellor, the Governor acknowledged that one of the key drivers of higher inflation were base effects, given how low the price of some goods and services reached last year. It was also recognised that the pandemic had caused demand and supply issues on a global basis. The logistics of shipping is perhaps a little more intricate than some recognise. We are now seeing many examples of bottlenecks at ports and a shortage of certain goods. This imbalance ultimately leads to a price rise for items in short supply. “Wisely and slow, they stumble that run fast.” (Romeo & Juliet) The argument as to whether these inflationary pressures are transitory or not rumbles on, with economists, investment houses and central banks divided. With regard to the latter, we have seen interest rate increases in countries such as New Zealand, Poland and Norway. In the UK meanwhile interest rates remain on hold, although the Bank of England are perhaps more hawkish than others. They acknowledge that inflation is likely to be in excess of 4% this year, however they expect it will return to target over their two year forecast horizon.

orientated economy and a ‘common prosperity’. Issues with property developers continue, although much of this is due the ‘three red lines’ legislation which was introduced in 2020. This included the limiting of leverage such companies were allowed to take. Whilst the Chinese government appear unwilling to save individual companies, they do want to protect those that may be disadvantaged, such as residents who may lose deposits already placed. There have also been crackdowns on financial software companies, internet/consumer technology, online gaming and after school tutoring. Whilst this has created short term repercussions around the Asian region, the action taken perhaps leads to their desired goals being met in the long term. A little heavy handed, maybe, but is that sometimes what is needed? “What light through yonder window breaks?” (Romeo & Juliet) Whilst there are clearly issues to contend with, it is important to take a step back and look beyond the noise. Economies are slowing, but from a rate of recovery which was always going to be unusually high after such a sharp contraction in 2020 for many nations. Forecast growth rates for next year still remain above longer-term trend rates. Whilst inflation has clearly been on the rise, these higher levels could yet prove transitory. Furthermore, part of the reason for the rise in prices is due to the increase in demand as we return to, hopefully, a more normal way of life. Perhaps we need to get back to an understanding where good news actually is good news, and not be so dependent on central bank emergency action(s) to get by.

12 Lowes.co.uk