Rob Burgeman is an Investment Director at Brewin Dolphin, one of Wren Sterling’s investment management partners. In this article he looks at what’s going on in the world through the lens of Fear & Greed.
I have used the Fear and Greed Index produced by CNN business as a barometer of market sentiment. Stock markets tend to oscillate between these two extremes and I find it a useful measure of where we stand at present. As you can see, things are not feverishly overexcited at the moment, with global investors on balance finding more things to worry about than not.
What has been going on this year?
It has certainly been an interesting first half. The first quarter of the year saw a very sharp recovery in the share prices of those companies that had particularly struggled during 2020, but the last three months has seen a more balanced return. This shouldn’t be too surprising as the various measures introduced to counter the spread of the different variants of the Coronavirus proved that the level of restrictions would be rather more enduring than expected. A Christmas lockdown soon turned into a restricted Easter and the unforgettable opportunity to dine al fresco with an emphasis on the “al fresco” as the country shivered through the spring.
As restrictions have eased, the Rule of Six has been transformed into the Rule of Sixty Thousand (special Wembley edition), with a great deal of reliance being placed on the “common sense of the great British public”. If pictures of an England fan setting off a firework from a place no firework should be set off from are anything to go by, this reliance might turn out to be as misplaced as the firework itself.
Nevertheless, the pace and scale of the vaccine rollout in the UK and, increasingly, across the developed world has made each wave less disruptive than its predecessor. We cannot be too far from the point where a combination of the vaccinated and those who have already had Covid will make it harder for the virus to propagate, allowing a swifter return to “normality”.
So, what are markets worried about?
Firstly, growth and the pace of the recovery. A beleaguered leisure and hospitality industry has seen a second year of extreme disruption and, were it not for the support provided by the government in the form of furlough schemes, would not have survived. However, these support schemes will, necessarily, need to be withdrawn over the rest of the year and, if this coincides with continued restrictions, any recovery could be much more muted than hoped for.
That said, it would be disingenuous to assume that the Chancellor is simply going to watch the economy grind to a halt. The last budget put in place very generous capital allowances to encourage businesses to invest and, indeed, to bring forward their investment plans. These kinds of schemes are being replicated across the world.
Secondly is the pick up in prices. Partly, this is a question of demand and supply with a sprinkling of necessity. A lot of spending that was deferred during 2020 has combined with the normal 2021 demand to see a sharp increase in sales for restaurants, building work and holidays. However, this spike in consumer interest has run head long into a shortage of staff within the hospitality sector as many people formerly employed in the sector have moved on. Formerly, employers could simply recruit from within the EU, but post Brexit, this route is more difficult and has struggled to reattract a lot of overseas workers who have returned to the EU over the last eighteen months and have shown little inclination to return. Brexit, too, has disrupted supply chains for a lot of industries – the days of “just in time” inventory where businesses hold a minimum of stock have, if not gone, been put on hold for now.
Businesses, too, have used the “opportunity” to rebuild shattered balance sheets. VAT on food in restaurants has been cut, yet most restaurants have put prices up. Hotels and Holiday Lettings Agencies have taken advantage of the surge in staycations to put up prices. However, after a year of almost no revenue and continual disruption, is this a surprise? I think not.
The key is what the reaction of central banks like the Bank of England, the European Central Bank (ECB) and the Federal Reserve in the US will be.
What will these reactions be?
I think it depends on which country we are talking about. In the UK, this inflation I have talked about would need to feed into a broader rise in wages – the so-called inflationary spiral – before the Bank of England would be worried. Yes, in certain industries wages are rising – front of house staff, chefs etc. – but in many industries, not least the Civil Service, wage rises are running below the prevailing inflation rates.
Europe, too, despite some rumblings from the Bundesbank in Germany for a return to greater rectitude in government spending, the ECB has raised what it perceives as an acceptable rate of inflation, recognising that what Europe needs right now is probably not higher interest rates.
The United States is the exception, here, where the Federal Reserve has indicated that it expects to raise interest rates in the face of a sharp recovery and tight labour market. The US, of course, as the wealthiest country on the planet, has quickly overtaken everyone with their vaccination programmes. Even here, there is no indication that any rise will be either imminent or sustained.
Bear in mind – and whisper this quietly – that if you are a government or a country who has just had to borrow a lot of money – and by “a lot” I mean the biggest peacetime rise in government borrowing on record – then a dose of inflation comfortably above the rate of interest you are currently paying is welcome. Like any good magician, however, the secret is in distraction and diversion, but if the £1 you owe today is only worth 97p next year, that’s magic!
It is worth remembering, too, that the inflation rate is just a measure of change over the last year. A year or so ago, aside from toilet rolls and dried pasta, inflation was extremely subdued – unsurprising as nobody was buying anything as there were no shops open – and the inflation rate (the CPI in the UK) was 0.2%. The latest figure is 2.1%, a far, far cry from the kind of levels that we saw in the seventies and eighties.
Should I relax a little then?
Relax in haste, repent at leisure as we like to say. There are always things to keep an eye on, not least China. China is at the same time a fast growing economy and a rapidly emerging global economic and geopolitical powerhouse. However, it is becoming much more assertive in its dealing with its own companies – witness the sudden cancellation at the eleventh hour of AntPay, one of the largest new issues or the effective torpedoing of the flotation of Didi, the Chinese ride hailing giant, where the Chinese authorities “expressed” their dissatisfaction of the companies choice to list in New York by announcing an investigation into the company less than 24 hours after their listing, knocking 25% off the share price.
At the same time, the Chinese authorities are very keen to find Chinese solutions to Chinese problems. This won’t necessarily shut out western companies, but it does mean that they will not be given a carte blanche to do as they see fit. Part and parcel of this is that if you want to do business with and in China, you need to do so on their terms.
At the same time, China has been very active in the emerging world, providing finance for and ownership of key infrastructure projects, securing resources for China and markets for its own goods. America, as global top dog, is not taking too kindly to another alpha country on the block. Trump instituted a number of sanction s on key Chinese companies, but these have not been rescinded by the Biden administration who have even tightened them.
More to follow, especially given the global shortage of chips.
Shortage of Chips? Surely there are plenty at coastal resorts?
Not that kind of chips – the silicon type rather than the salt and vinegared ones. The increasing electronification of the world and miniaturisation of everything has seen a boom in demand for plants capable of producing, at scale, smaller and smaller devices destined for….well, everything. The problem is twofold. Firstly, the cost of building these plants is eyewatering – $3bn to £5bn – and takes time. Secondly, the major power blocks do not want to rely on each other for their chip supply, so they are insisting that the relatively small number of global players establish these production facilities “locally”.
One of the major producers is Taiwan Semiconductor Manufacturing Company (aka TSMC). As its name suggests, TSMC is based in Taiwan, an island off the coast of China which is at the same time part and not part of Greater China. Independent since the Chinese revolution when Chiang Kai-Shek fled the mainland to set up the Republic of China, the country has never been recognised by China and is the most likely flashpoint for tensions between the US and China, as both countries see it as part of their sphere of influence.
However, this chip shortage – aside from being cited as a problem by car manufacturers and video game console companies amongst others – is seeing massive investment into production and technological innovation, speeding up the changes that we have all witnessed over the last few years.
I am afraid so, but the only constant these days is change – technology just makes the whole process so much faster! Business and industries – my own included – have to adapt and evolve and become much more flexible in the way that we deal with things. Indeed, as I have said before, if the pandemic had hit ten years ago, its effects would have been far more economically devastating than they were. Businesses now – at least a lot of them – have more resilience to adapt to be able to work remotely, to adopt agile and flexible office practises to ensure that business can continue.
In this environment, a constant re-evaluation of investments is essential to make sure that portfolios remain relevant and do not become obsolete. A broadly diversified portfolio – by region, by sector, by company – has historically proved to be extremely resilient and I have no reason to think this will change any time soon.