We welcome questions from our investors. Investment managers can work in a bubble, so it’s invaluable to hear what is actually worrying the owners of the money we manage.
Top of their minds is whether the economic and capital market cycle is coming to an end, and what’s with the UK’s uncertain post-Brexit trading position. There are real fears from investors I have spoken to, going as far as anticipating the reappearance of 1970s style capital controls. After years of ‘markets can only go up’ investment returns, there is clearly a growing private investor sentiment of ‘should I cut and run before the pain?’
In short, no. Easy for me to say, but why not?
The slowing of global economic growth, together with a return of some inflation, is having a sobering effect on equity markets, following their short but passionate fling with “irrational exuberance” in January. The Bank of England delaying a near certain rate rise on the grounds of diminishing economic growth and inflationary pressure has added to the sense that all is no longer well in the global economy.
Donald Trump’s renewed assault on global diplomatic consensus by withdrawing the US from the Iran nuclear deal, which took 10 hard years of negotiations, adds to the fear of potential unwelcome external shocks. After opening the prospect of a trade war with China in April, his pouring of oil onto the lingering flames of tensions in the Middle East now increases the possibility of military conflict between the various regional hotheads. Predictably, the price of oil hit its highest price in three and a half years.
Admittedly, this is a steady stream of disconcerting economic newsflow. But is it anything to really concern investors? Or just another new normal?
The missing triggers
Just how likely is it the current economic cycle will come to a sudden end? Activity levels are undoubtedly slowing, and this cycle is now the second longest of the last 100 years, but as I’ve said before, economic cycles do not die of old age. They come to an end from one of three reasons: economic overheating, central bank policy errors or external shocks.
Remember the boom and bust of Nigel Lawson? Overheating.
Central bank error? The Federal Reserve hiking US interest rates in 1994, directly causing a recession.
And external shock? The 2008 global financial crisis and the 1970 oil price shock are both prime examples of this. So are any of these three causes happening soon?
