Asset Management

Investors’ Outlook: Give us a good old villain to bring out the best in you

Dan Scott

Dan Scott

Chief Investment Officer, Head of Impact & Thematics

Meet Dan

Life as portrayed in James Bond movies is relatively simple. There’s the good guy, struggling to overcome the obstacles thrown in his path by some Dr. No, Goldfinger, or Jaws. The hero ultimately triumphs, basking in glory and the admiring gaze of Miss Moneypenny. We will be reminded of this virtual reality shortly with Daniel Craig giving his farewell performance. He knows that we occasionally need an old-fashioned villain to bring out the best in us.

That said, things are looking rather grim on the world stage. Are we on the eve of entering a new Cold War era? The recent surprise announcement of the military pact between Australia, the UK, and the US was a strong signal to Beijing that the “West” is keeping a watchful eye on the Pacific region. Washington and London will, as part of the trilateral deal, supply Canberra with at least eight nuclear-powered submarines.

Muscle-flexing abroad is sometimes accompanied by a tighter regime at home. The Chinese Communist Party, for one, has tightened its grip on the entertainment as well as the corporate sphere. Last month, the authorities announced the imminent ban of crypto transactions and the mining of digital assets. A massive clamp-down on entertainment has also followed. Some of the country’s biggest celebrity fan clubs were wiped out from the country’s internet in a matter of days. Cartoons and TV shows aimed at children are to be banned if the content is considered too graphic or violent.

Meanwhile, China’s policy of “three red lines” that aims to crack down on excessively indebted companies has toppled one of its biggest property developers and sent shockwaves through the global economy. The troubles surrounding Chinese property giant Evergrande are likely to be well managed and remain contained as an isolated domestic event. They remind us, however, how close we are to the possibility of a Chinese “Lehman Brothers moment”.

Markets fear inflation, I fear stagflation

Financial markets are increasingly worried about rising prices. The spike in inflation witnessed as economies reopened following months of pandemic-induced lockdowns has turned out to be a lot less temporary than initially thought. Inflation rates are expected to remain high in the months ahead given stifling global logistical bottlenecks. Container freight rates have increased more than fourfold compared to pre-pandemic levels. The outcome is higher shipping costs passed on to consumers. Bond (pardon the pun) yields have begun to drift higher as investors position themselves for rising interest rates. Given the pronounced slowdown in economic momentum, I fear we could have an altogether more difficult situation ahead of us – stagflation, a situation where the economy stagnates while inflation persists at high levels.

How does this impact our investment strategy? The current “post-peak” economic environment does not change our neutral equity positioning. Equities have historically not performed negatively over 12 months under such circumstances. We do, however, prefer US equities over European ones. The US stock markets hold more growth-oriented tech companies than their European counterparts, which are more geared toward financials and energy firms. Within fixed income, we continue to see opportunities in emerging markets.

Keeping the hero-villain relationship in mind, let’s for a moment assume we’re the good guys successfully dealing with Bond crooks like Alec Trevelyan, who tried to bring down the world economy in GoldenEye. After this little morale-boosting exercise, we hope you will stay invested in the real world. After all, time in the market – staying invested for the long term – is more important than timing the market – trying to guess a share’s next move.