Investment Management -
An investor’s view of the macro-trends impacting the four biggest economic blocs.
Q: Tell us about the mega-trends which are impacting the world’s largest economy?
What a start to the year! After Trump’s second impeachment which went largely unnoticed by markets, President Biden proposed to unleash an additional $1.9trn in fiscal support on the heels of the $900 bn that had just been approved. This support will be loosely allocated across four buckets:
- State and local governments in desperate need of funding
- Covid track & trace/vaccination roll-out
- Individuals under a specific income threshold receiving direct cheques
- An extension of unemployment benefits.
Our thoughts on this tremendous fiscal injection? The extension of unemployment benefits is a win-win for stock markets and the economy. As a reminder – the US doesn’t offer the same safety nets which are on offer in countries like Germany or France – so this type of support represents a big cultural shift. It is however sensible against the backdrop of the levels of unemployment that shocked to the upside and in light of the fact that over two-thirds of the US economy is based on consumption - an extension of benefits could in theory help to mitigate a double dip recession.
Having said that, we are more cautious on the direct stimulus cheques at such a high income threshold (Biden is hoping for a max level of $75K) as these could be used for other things like buying stock in Tesla or supporting the Robinhood style investments we’ve seen recently. Or they could just return into the banking system via consumer savings, which would defeat their purpose and further weigh down the banking system.
Q: Democrats have taken the House and the Senate. What’s your take on this blue wave?
We think the ‘Blue Wave’ is bullish for the economy as it will probably result in political de-escalation such as less sabre rattling on Twitter, an organised Covid response and more spending. This means lower volatility and higher consumption, two conditions which stock markets like.
Why are we so confident in that? We think Joe Biden will be a one term president – which means Kamala Harris’ election bid will be right around the corner, so Biden will do everything in his power to help her gain office which means avoiding any far left-wing policies! He’s planning for 12 years not just four years.
Looking at US politics going forward, we suggest viewing his announcements/initiatives through the above lens.
Q: Could anything go wrong for markets in the US in 2021?
The one risk we see is the possibility of rising rates as we’ve witnessed after other shocks to the economy like in 2013. However, I do not think we are at risk of that this time around, due primarily to the new framework which the Federal Reserve has launched. Chairman Powell also came out recently to remind the market that interest rates would probably remain lower for longer, unless significant imbalances manifest themselves.
Q: There seems to have been lots of doom and gloom here and headlines are pretty bleak as our government is projected to have more than £2.2 trillion in borrowings, but is it all that bad?
We don’t think so, for three reasons:
Firstly, a huge uncertainty is now behind us, namely the prospect of a no-deal Brexit. Whether you were for or against, is not relevant, what investors crave is certainty, and we now have that cliff edge behind us.
Secondly, we don’t believe interest rates will go negative – which would be detrimental for the banking system in our opinion. Yes, the Bank of England has asked banks to prepare for the eventuality, but we sense this is them just playing it safe.
The reality is that negative interest rate policies (NIRP) send a very negative signal to investors about future economic confidence, furthermore it is questionable whether they will actually help to stimulate additional lending.
Thirdly, the UK investment complex is made up of many ‘value’ stocks such as energy and financial services companies. With the vaccine roll-out, this should, all else held constant, increase mobility and we should expect a further rally in oil and a positive impact on energy stocks. This is also true for banks where a rise in certain yield curves could positively benefit their narrative. In portfolios, we are expressing a positive view on the Pound against the USD, EUR and Yen.
Q: What mega trends do you see impacting Europe?
I would like to focus on what’s going on in Italy – as usual we’re witnessing political volatility, but I’m not too concerned for two reasons:
Firstly, the ECB, after an early misstep at the beginning of Christine Lagarde’s tenure, safeguards Italian yields. In other words, the ECB understands that the Italian Government bond market is one of the most important markets in the world, and it will not let that market be disrupted. On that, a quick reminder about what quantitative easing (QE) or bond buying does – it’s a technique for suppressing interest rates and ensuring bond markets stay liquid.
Governments do this to help companies access funding and so investors don’t get stuck holding illiquid bonds, which would make them lose confidence.
If you’d like to find out more on QE and why the topic is so important at the current time, look out for our QE explainer which will be out in a couple of weeks, followed by our latest thought leadership piece which will focus on the topic later in the quarter.
Secondly, we believe that political volatility is often transient and can be ignored by longer term investors due to the implied support which the ECB is providing.
Q: The key topic in Asia seems to be the different way China and Japan have performed economically, can you explain what is happening and whether this is meaningful for markets?
Indeed, we’re observing a real bifurcation in economic performance between China and Japan.
China is the only major economy that has come out of the pandemic with a V-shaped recovery – exports have grown, and so have consumption, auto sales and industrial production whilst Japan, another economic powerhouse, has really struggled with things like lacklustre inflation.
One of the main takeaways here is that a country doesn’t need to have a strong economy to have strong performance in equity markets – both Chinese and Japanese equities have done well so far. We believe the main factor helping this story is credit growth. I always like to remind younger colleagues that credit, not equities, make the world go round!
Q: Looking forward, do you see any trends shaping 2021?
We suggest the risks are to the upside in 2021, as mobility increases and savings gets unleashed later in the summer – all this supported by the trifecta of monetary policy, fiscal policy and the vaccination roll-out. We would venture to say the equity market hangover sets in during 2022 – and just on that potential we strongly recommend reading Jeremy Grantham’s investor letter entitled “The last dance - a sober reminder from a stock market grandee of the dangers of investing in hot markets ”, which can offer readers a different perspective and help investors remain well-informed during this period.
I hope you found this overview useful. We’ll shortly be sending you a note authored by Ed Johnstone offering a ‘look-back’ on how we have navigated portfolios over the past 12 months. Please also look out for our QE explainer and thought leadership piece later this quarter. These papers are designed to help communicate the real impact of quantitative easing and what it means for investors around the world in simple language.
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