7 Minutes on Markets - Q1 2022 Market Update

Ben: Hello and welcome to 7 minutes on markets. I'm Ben Kumar and I'm joined by Doctor Terence Moll.

It's the start of a new year and one in which we hope we can start to move away from thinking about COVID-19 the whole time. And, certainly Terence, people are starting to look at more conventional economic measures – the sort of things we have looked at for the past few decades. The interplay between growth and inflation, for example.

It's probably worth reminding people, as we leave this kind of ‘crisis mode’, how we think about these concepts from an investment standpoint and then going into what our outlook is.

Terence: Yes, I think the starting point is that it’s important to understand that growth and inflation are these gigantic forces, which influence absolutely all asset classes. Now, in the last 30 or so years in the Western countries, we've had a very distinctive pattern; we've had growth gradually drifting down on the whole, and we've had a fairly sustained fall in inflation. Some of us can remember the late 80s when, in lots of Western countries, inflation was around 10%, sometimes higher, and that's steadily drifted down until recently, when it's been more like 1%, which was partly an effect of course, of the global financial crisis when.

Post-financial crisis, lots of people were paying back debt and governments were very conservative about policy, and we had an environment that had almost stagnated. Now, all of a sudden, we've had the pandemic, we've had lots of bottlenecks, lots of supply issues, inflation has popped up to levels in some cases not seen for 40 years – rising 5% or more. And I think this has been really interesting, but I think the two key points here are, firstly, we don't think it will spiral out of control, we won't get the nasty wage price spiral that we had in the 1970s, and instead I think we're more likely to see inflation levelling out at about 3% rather than the 1.5% that we are used to.

But I think that will fundamentally be quite healthy. And, on the other side, I think the kind of conditions that have led to that inflation will lead to investment, will lead to all sorts of new opportunities, and will in fact lead to faster growth. I think for many people inflation will be tricky at times – they will need some adjusting to do, but I think the economy will come out of it better.

Ben: Which is quite a positive story. The thing we're noticing in markets at the moment, at the end of January, though, is that they're not adjusting too well to a different environment, which I think is something we are used to it. Investors don't like changing their habits. But for both the bond market and the equity market, things are starting to change. Now, does that mean something is wrong or does it just mean it's different?

Terence: Yes, I think it means that we're in a slightly different environment and I think what people often forget is that markets can be very emotional places. For a long time, they may not do very much they're very calm and then suddenly they hissy fit and they throw their toys out of the cot, and whatever other analogies makes sense. And I think we've had a period like that recently, which I think in a way is kind of sensible.

My favourite example is Peloton, because through the course of 2020, its price went up six times because people suddenly wanted exercise bikes, because they had to exercise at home and they couldn't go to the gym. And clearly it's price went too far, and since the beginning of last year its price has been falling. Now, with the moves this year, its price is down 80% from its high and it's at exactly the same level as it was at the beginning of March 2020 and it strikes me, it's been through this huge cycle and it's back where it started, and that's probably the right place for Peloton to be.

I think a lot of the other adjustments that we've seen in prices have has been similarly kind of sensible. If you look at the output failure, for instance, you got the likes of Berkshire Hathaway, which is a valued quality, industrial company that is slightly up this year, which I think it should. It has vastly outperformed the S&P.

On the other side, we've got some of our climate change opportunities which had been struggling. They haven't had the greatest of times this year. But I think in both cases, they are responding appropriately to the environment, and if you take a five year view on both, I think both are going to do very well indeed, and it's entirely appropriate that they should have had different responses in adjusting to their period over the last few weeks.

Ben: Which I think sets us up to describe the next stage of the cycle and our portfolio positioning. We're already looking for the five-year opportunities, which is what we should be doing. The short-term noise tends to be a distraction. There can be opportunities, such as the sharp selloff in COVID, where we do just want to be buying things that look very, very cheap.

But actually, more often than not, over the long term, our investments are going to be playing out on slightly different time scales, and we hope that the ultimate end point is going to be positive.

A final quick word I'll just say on interest rates. A rising interest rate environment is going to be particularly challenging for cautious investors. So, we continue to do everything we can in those portfolios, whether it's avoiding government bonds by buying alternatives, whether it's looking in other areas of the fixed income market, and sometimes just holding a little bit of extra cash. Protecting against the interest rate rises is just as important as those longer-term equity positions, which should outperform.

I think that's probably it for this quarter, so we look forward to speaking with you again in April.

Goodbye.

Terence: Goodbye.