7 Minutes on Markets - Q4 2021 Market Update

Ben: Hello. Welcome to 7 minutes on markets. I'm Ben Kumar from the investment team and I'm joined by Ahmer Tirmizi.

Ahmer: Hello.

Ben: We're sitting here in October 2021 and my overriding thought is how quickly the year has gone. Where did summer go? The other overriding thought is how scary things seem at the moment, particularly in the UK. The headlines are all about shortages in petrol, about supply chain, disruption about the port of Felixstowe being full and about Christmas maybe being under threat because there aren't going to be enough toys for people to buy. So, it feels quite scary, Ahmer which I think means we need to really explain why we're so positive about the growth trajectory we see in the world.

Ahmer: It is a really good question and I think it boils down to how easy it is to focus on the negatives of an economic recession, which is understandable, but economic recessions can be reset. They can reset parts of an economy that have been struggling.

The question for us as investors is what exactly is being reset. I think one of the most important things are in the economy right now is the ability of the US consumer to spend money.

We've seen over the last year that huge build-up in cash savings, whether it's from pent up savings, whether it's from the huge amounts of fiscal stimulus, whether it's from the high income workers who didn't lose their jobs in a recession, all of those things have played their part.

There's only one thing that people tend to do when they have lots of extra cash.

They tend to spend it and the next question for us of course, is how quickly do they spend it?

Ben: Which I think is interesting, because if they are anything like me, then the average US consumer has bought all the goods they need during lockdown, when Amazon deliveries were turning up twice a day, so they have to spend it on services. But there's only so much you can spend on restaurants, cinemas, hotels, travel, to make up for that for the last year or two, you can't eat at a restaurant twice, three times a night. You can't stay at more than one hotel and you can't go and get multiple haircuts.

So, we think that spending is going to come through quite slowly but steadily and be a constant bitter support for the economy over the next few years. But there's a few other things to note, right?

Ahmer: Yes, that is absolutely right. As much as I'd like to stockpile holidays, I'm not sure I'm able to.

One of the other resets that has happened in the economy has been around housing. You've seen this huge surge in prices, not just in the UK, but it's happening in the USA, it’s happening in Europe as well, and home builders are licking their lips at this situation. They love situation where there's not enough houses to go around and prices going up and the impact of home building tends to really have far-reaching consequences to the wider economy from the construction companies to decorators, to estate agent, to solicitors, it tends to be far-reaching. And we think the multiplier effect, as economists tend to call, will be significant. So, that’s going to be one driver of growth. The other driver of course is around governments.

We’ve talked about people ending their own personal austerity, but governments are to. The speed and the size of the stimulus measures that we saw last year, from all types of governments across the political spectrum, suggest to us that the era of austerity is over, and that can only be a good thing for growth.

Ben: But it raises the interesting question – it’s one we hear a lot from clients, particularly at the moment - growth is one thing, but what about inflation? Because that's the other key thing we really need to get a handle on if we want to talk through our positioning. So why isn't inflation going to be going to be a problem? Why isn't it going to stay high?

Ahmer: Yeah, I think that's another good question and inflation is a funny one. While people tend to only focus on the negative spiralling upward climb.

Your recent commentary even refers to how people are geared towards remembering bad news, and I think inflation is definitely a good example of that.

Our view is that the deflation that we've seen over the last decade or so is over now. We talked about reset from a recession and inflation is certainly one of those things that is experiencing a reset. We have seen pausing globalisation, we have seen more for want of a better word, left wing economic policies, and you've seen an end to austerity. All of these things put together are helping to end that era of inflation.

We also don't want so don't think that inflation is going to spiral out of control, because the recent high inflation numbers, we think, are just temporary. You've seen the immediate prices of those COVID winners surge, so whether it's used car prices, whether it's furniture, those prices have surged and they're about to come down because people have stopped or are going to slow down their buying of those things, as you mentioned earlier. While the recent reopening beneficiaries, the prices of those, whether it's hotels, restaurants or airlines, they can't go on forever again for the reasons that you previously mentioned, they can't keep on buying the same thing again and again.

And when you take a step back, the economy itself just isn't set up for spiralling inflation. Just look at the cost of new technologies. It just keeps on relentlessly falling. And that will keep an overall lid on too high inflation within an economy. So, in other words, our outlook for inflation, it's not too hot, it’s not too cold.

Ben: The famed Goldilocks scenario. And what that means for portfolio positioning is that we are looking for the beneficiaries of strong growth. We're not too worried about having extreme pricing power to protect against high inflation because we just don't see that as very likely, so our portfolios are tilted towards the more cyclical areas of the economy. It's a tilt towards the emerging markets, which supply still a lot of the other goods for the growing world, it's a tilt towards the places in developed markets that that do the same thing. It's the industrials, it's some of the materials, it's some of the financials as well, because as growth and confidence grows, people will return to the banking sector.

Those investment - over the next two or three years - we believe are going to be the ones that are going to be rewarded. You're going to see some of the recent winners, the large, massive tech companies, do a little bit less well compared to some of the somewhat old school, traditional beneficiaries of a growth cycle.

We'll leave it there and we will talk to you in 2022.