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An investor who has all the answers doesn’t even understand all the questions.”
Sir John Templeton
So far so good!
Could be the one-liner summary of market performance so far for 2023, but, then again, there is also the joke about the optimist who fell from the top of the Empire state building and said this as he passed each floor on the way down …
“Faites vos jeux. Rien ne va plus.” This is the expression uttered at casinos before they spin the roulette wheel. Investors are still obsessed with gambling on interest rates and inflation, but anyone who has ever visited a casino more than once will realise that the deck is heavily stacked against you, and no hot winning streak lasts forever.
What if?
Sometimes in life, it is fun and useful to question the consensus and just ask: “what if?”
WHAT IF?– The only people that care about interest rates and inflation are the participants in financial markets, not consumers in the real economy? We all know that there has been a marked increase in food prices, for example. But think about it at the consumer level: even if the price of a loaf of bread has gone up 10%, will that stop you having toast each morning? Looking at consumer behaviour globally, it is very hard to see any significant evidence of a slowdown.
WHAT IF? – The last decade or so of low interest rates and inflation was an anomaly in the longer-term view of economic cycles, and we are now returning to a more normal period of sustained higher inflation and higher interest rates? We have Japan as an example of a country that has gone through decades of low interest rates. Looking at that data, one could easily conclude that the experiment has failed and proven that low interest rates are unable to produce decent economic growth.
It is not the strongest or most intelligent of the species that survives, but the one that’s most adaptable to change.”
Charles Darwin
WHAT IF? – We are moving towards an era where labour shortages mean that the average worker has more pricing power and will have more financial firepower at the end of each month? Whilst this will dent profit margins of some companies, it could also lead to a more virtuous circle of economic growth, given the average worker is more likely to spend more of their income.
WHAT IF? – Recessions are avoided and economic growth picks up? Of course this means that interest rates are likely to stay at higher levels for significantly longer than many anticipate – but does that even matter if economic growth is strong?
WHAT IF? – We have reached the peak in passive investing and economies do well, but markets (especially the US, because of its unique make-up) don’t do much except exhibit volatility? Investors will most likely have to go back to the classroom and learn how to analyse company balance sheets and fundamental data and work a lot harder to generate returns.
WHAT IF? – The last 15 years or so of US stock market outperformance and dominance has finally come to an end? Whilst this sounds unbelievable to many investors given recent history in financial markets, one of the most important lessons to be learned is that nothing is forever.
The strong start to the year for financial markets has caught most investors by surprise, but perhaps it can easily be explained by the fact that investors were just too pessimistic by the end of last year. My intuition (and it can be no more than that) tells me that we have seen a seismic shift in the global economy and markets, the likes of which we have not witnessed for over 30 years. Whilst returning to normal would be considered boring, the repercussions for financial markets are likely to be anything but. Significant change can be scary, but as Charles Darwin said “it is not the strongest or most intelligent of the species that survives, but the one that’s most adaptable to change.”
PETER AHLUWALIA | PARTNER
Chief Investment Officer
peter.ahluwalia@swisspartners.com
Illustration © Adobe Stock
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