As the Russia/Ukraine conflict has highlighted, all financial markets are so interlinked, you do not know where the issue will be. Investors need to be wary. We however remain confident that central bankers, learning from the lessons of the past, will see us through. It is time to look at that past, the 1970s.
For the past few ViewPoints we have, some would say, been kicking and screaming about the persistence of inflation and the market’s apparent ignorance. We had labelled this ‘inflacency’, and while the problem seems to be gone in the short-term, it appears the dreaming in markets has not evaporated, it has just been pushed further into the future.
The pace of economic growth is diverging. Some emerging markets are tightening, Europe and the US are heading toward tapering, growth in Australia has all but faltered and China has its own set of problems.
Markets appear to have priced in a return to ‘normal’. With an unwavering commitment by central banks to not fight inflation. The environment is being called reflationary. Reflation has happened before.
While e-commerce penetration has quantum leaped the last few months we observe a potential regime change may be at hand. For the last few years across developed markets, growth stocks have outperformed value by a long way. This may be coming to an end.
It’s the definition of Black Swans that you don’t see them coming. Two have sailed into view: COVID-19 and an oil shock. In some ways they offset, in others they amplify. And it’s early days to have clarity on how big or how long-lasting their impact will be.
This time a year ago, the trade war was going to be quick and “easy to win.” Now it’s clear that it will be an ongoing series of, often escalating, skirmishes, punctuated by face saving “deals” and “phases”.
Seasoned investors talk of markets “climbing the wall of worry.” That is, far from potential problems pushing markets down, fear is leaving players under-invested and markets despite the uncertainty trend upwards. You could say that in 2019 the market has been vulnerable to relief rallies!