As we sit indoors with rain and overcast skies whilst watching stories of holiday-makers suffering wildfires and 45-degree heat in Europe! the world seems full of contradictions.
Markets similarly are performing in unexpected ways with tech taking off at a tear this year whilst some safer assets, after a short resurgence, are again lagging.
The key issues we see to pay attention to are demographics and changing climate over the long-term, inflation, interest rates and political fractiousness over the short to medium-term.
The fastest ever rise in interest rates has, so far, had a mixed effect on its target inflation. This is perhaps because savings outnumber borrowings by £4 to £1, and so rising interest rates, some would argue, is mildly inflationary.
The biggest concern seems to be that having left things too long, Governments will now go too far, for one of the challenges is that very few of the decision makers have worked in inflationary times. This week, we had a visit from a major financial institution proudly pointing out that two of their Managers had just passed their twenty-year point managing money for the firm. My thought process was, so they have no experience of management in inflationary periods!
The splintering of the world, economically, is undoubtedly going to change opportunities & threats to both Economies & Countries, and of course, therefore, markets. Whilst it has been very profitable and is common to hear the phrase “never bet against America” and all we hear about China in the Western media is that “led by a faltering property market, it is in the doldrums”, however, the fastest growing world trade is between China, Africa, South America and the Middle & Far East. In the last year, numbers such as an increase in exports from China & some of these places between of 25 & 50% is not uncommon, with up to half of this being goods that can be used by those countries to make things themselves, so we need to be mindful of a changing world.
Meanwhile, the US clearly remains a world leader in Tech & Artificial Intelligence (AI), which everyone is now talking about. History tells us the early pioneers “lose everything”, and after a couple of years, people go what “was that all about” and then ten years later it has changed the world. So, at this time, we should be making our haste slowly, to quote my father!!!
Businesses, who are after twenty years of abundant & ever cheaper money are over levered, will clearly struggle.
Ultimately, quality Companies will always win out and, with interest rates having risen, investing in these and quality Bonds (Loan stock) using Exchange Traded Funds (ETFs) to keep costs low & diversification high, we believe remains the best approach.
In the meantime, let us hope some of that warmth, but not much, comes here for the second part of the Summer and markets give us the same.