Seven from 7

Around this time every quarter, we try and answer the questions that are hitting the Investment Team inbox most often – and without using 100 words when ten will do.

What are investors likely to get wrong about the next year?

They’ve forgotten what growth looks like. The slow, grinding recovery from the financial crisis never felt good – always on the verge of faltering due to a lack of confidence. The wave of post-COVID-19 spending, which is about to unfold across the world, is something completely different. Many investors aren’t ready to believe yet. But they should be.

How concerning are the latest inflation numbers?

Not worrying at all.

Short-term inflation should be ignored. Inflation is calculated comparing this year’s prices to last years. Last year distorted the data to such an extent that any comparisons become very difficult. How can you compare the price of a haircut today, compared to a year ago when all of the salons and barbers were closed!?

Longer term, as we’ve discussed before, the conditions simply aren’t in place for a sustained period of high inflation (above say, 4%). The deflationary impact of technology continues, and there are no signs that rising wage pressure is likely to occur.

I see insert-name-here Investment Management has allocated to crypto-currency, will 7IM be doing the same?

No. At the moment, this is a bandwagon, not an investment.

We answered this last quarter too – and the point remains. It’s worrying to us that assets such as Dogecoin - which started as a very niche tech-geek joke in 2013 – are now worth more than long-established companies with working business models. We don’t know how to value Bitcoin, or Ethereum, or any of the other crypto-currencies out there – and we’re not sure anyone else in the mainstream investment world does either.

There may well be great technological advantages, which blockchain and crypto currency can offer the world. But right here and now, that’s still conjecture – and our clients do not pay us to speculate with their money.

Emerging market countries aren’t very ESG friendly, do they deserve a place in ESG mandates?

Absolutely. You can’t ignore 57% of the global economy if you really want to make changes to the way business works.

Another way to look at it is that these are the regions and companies with the most potential for improvement. China adopting clean energy policies makes a lot of difference – it is responsible for over half of the world’s coal-generated energy production. Or in India, a positive change to the governance approach in many companies could dramatically reduce the amount of low-paid labour.

Of course, monitoring these changes is more difficult, and it may take more time before the positive impact is felt. But ignoring emerging markets simply isn’t an option.

What are you doing about the risk of rising interest rates?

All sorts of things across our portfolios:

• Underweight to duration – simply having fewer bonds compared to our strategic neutral.
• Exploring outside the mainstream – there are a number of fixed income assets which might be less exposed to rising rates. Asian high yield bonds tend to be issued in emerging market countries, where rates aren’t at all-time lows. European bank credit pays sufficiently high yields to be able to compensate for any losses due to rate rises.
• Different forms of defence – bonds aren’t the only way to add defensive qualities to a portfolio. Whether it’s the careful selection of alternative assets, or perhaps tilting towards some of the more defensive equities, we’re thinking differently about portfolio construction.

However, perhaps the main thing we’re doing is remaining calm. While rising rates might well mean lower returns for bonds, the environment in which rates rise is likely to be a positive one for global growth. So, we’re also keen to find the opportunities in the growth parts of the portfolio – whether that’s in more cyclical equities, or in longer-term themes such as healthcare.

Equities are back to all-time highs, sell?

I’ve noticed that the people who say that “all-time highs mean that it’s time to sell” are often the same people who get scared and say “SELL” when the market is falling. And they also tend to say “sell” when markets are right at the very bottom too. In fact, they rarely say anything else.

All-time highs don’t mean anything. They are naturally occurring events. It sounds like a smart thing to say, but that doesn’t mean its good investment advice. Salim Jaffar, Investment Analysis at 7IM, dug into this in a piece last week and its worth a read.

When will governments come after companies to pay down their debts?

It’s started already. As the world recovers from COVID-19, it’s clear that many companies have continued to do well (look at recent earnings for Q1 2021). Much of this success has been helped directly and indirectly by government support – whether through emergency loans and grants to struggling companies, low interest rates, or simply putting money in consumers’ pockets.

The tax increases proposed in the US by President Biden are the best example of what’s happening already– with the bulk of the increases being levied on the giant multinationals, especially those for whom sales of software, services and other intangibles form a large part of their revenue.

Perhaps even more significant is the fact that the US is now engaging in the global community again after four years of Trump retrenchment. And one of the key things it is pushing is for a global minimum tax, something roughly in line with that proposed by the OECD and the G20.¹

On an individual level, few people like the fact that the Amazons and Googles of the world can avoid paying tax through clever accounting and location management. A global tax on these large tech businesses – perhaps spun as a “COVID-19 relief contribution” – would likely be very popular. Taking money from the rich and giving it to the poor is an old strategy, but it does win votes!

¹https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-two-blueprint-abb4c3d1-en.htm

Any reference to specific instruments within this article does not constitute an investment recommendation.