What is happening in the investment markets?

The world is full of problems right now, according to the news headlines. In our exclusive client webinar hosted on 2 November 2021, our Chief Investment Officer, Michel Perera, shared his views on the current issues facing investors and what is happening in the investment markets.

In this article, we briefly summarise the key points or you can watch the full recording below. 

What are the main issues for the investment markets right now?     

1. Growth slowdown

While economic growth may have slowed down from recent extraordinary levels, previously unseen in decades, Michel believes there is still quite a bit of cushion in the current growth rate which bodes well for investment markets.

2. Supply chain issues

The current supply issue is so huge and so global that every manufacturer and retailer in the world is working to sort it – and in a capitalist system, a shortage doesn’t usually last because someone is likely to fill the gap. For investment markets, it is important that the situation improves, even if it is not resolved for good.

3. Inflation

Michel argued that inflation is often misunderstood in how it is calculated and contends that it is more a psychological number – with the future of prices depending on our collective mindset – hence inflation is transitory. In addition, most people are focusing on the historical 12-month inflation, which rarely moves much – as opposed to the monthly readings, which reflect a more updated reality and give a very different picture right now.

Equities are normally the best hedge against inflation, provided the companies are well selected to have solid productivity, pricing power and the ability to absorb increases in costs. It really is about painstaking stockpicking, sector by sector and share by share. Gold and inflation-protected securities can also play a hedging role in portfolios.

You can hear much more in the video or read our more detailed articles about inflation here.

4. Central banks talking about raising interest rates

There is a saying on Wall Street: ‘economic cycles don’t die of old age; the Fed kills them!’ The reality is that central banks, in particular the US Federal Reserve (the Fed), have been managing cycles since World War II, causing recessions whenever inflation was getting out of hand.

Now central banks are again talking about raising rates, which could at some point end the cycle. But why would they do it? Only if they feel that inflation is truly out of control. The Fed, which is the one central bank that matters for global markets, has come out with the word ‘transitory’ to describe current prices pressures.

5. US debt ceiling: will the US government default?

The US is the only country that has a debt ceiling, which must be raised every time you hit it, otherwise you have a government shutdown.

The risk of default has been discussed many times before but has never materialised. If it does, the consequences could be a brief spurt of volatility in various investment markets until politicians agree a solution to the inevitable global uproar.

You can read more about soaring global debt in our full article here.

6. Chinese property market and government regulations

There are many ways to look at it: you can say that China is trying to make the country more communist and hence Chinese equities will always underperform. Another way is to understand that China is trying to catch up with the rest of the world and its objective is to improve the standard of living of its citizens.

In that respect, once you understand Chinese cost of living (particularly housing, healthcare and education) is an issue, regulation looks much more reasonable than the headlines of ‘clamping down’ suggest. If more than half of our schoolchildren were being tutored and being charged outrageous amounts per lesson, our governments would intervene too. If property speculation was raising housing prices to make them unaffordable, our governments would intervene. The problem is not the rationale for the regulation, it is a misunderstanding about what they are trying to achieve and the speed at which things have happened.

As well as watching the video, you can read more in our full article about whether investors in the Chinese stock market should be concerned by the regulatory crackdown.

7. China - US tensions: will China invade Taiwan?

The US and Chinese economies are intertwined in a way that never happened between the US and Soviet Union during the Cold War and so, before taking such a massive step as invading Taiwan, the Chinese government might think about its economic interests and trade surplus.

Geopolitics is, has been and will always be, the wild card in investing. It is our experience, however, that when you let fears of any such events stop you from investing, you eventually end up having to buy the markets a few years later at a higher level.

8. Value vs. growth stocks or should we be looking at thematic investing?

We have often discussed value vs. growth stocks during the pandemic. When there was little growth in the world, investors were willing to pay extra to get growth. Where there is an economic upswing, investors opt for cheaper shares, which are called value stocks.

There is a game to be played by switching from one to the other, but we are increasingly finding that you have to look deeper to find good opportunities, namely thematic investments. You can read our full thematic investing article where we discuss investment opportunities that are global in nature and stem from an analysis of long-term trends, such as longevity, deglobalisation and geopolitical tensions.

These themes are also part of our broader approach to sustainable portfolios, called ESG (environment, social and governance) investing.

9. US politics

US politics might throw a spanner in the works again. Biden’s popularity has been falling, which means getting legislation passed could be more difficult; and betting markets are currently telling you that Trump might win the 2024 presidential election. As ever, it is too early to tell whether the US political situation will be good or bad for markets, but there will undoubtedly be some volatility associated with US political uncertainties.

What should investors conclude?

While most of the issues exercising investors are valid concerns, they are well understood – and markets have already mainly discounted them. Only something new is likely to derail risk appetite – and our team is constantly surveying the landscape to anticipate and react to anything new or unexpected.  

We also believe that the ability to take a contrarian view against well-publicised problems, like those outlined above, means that any corrections in markets or soft patches in the economy will provide opportunities to invest, add to risk and use extra cash sitting earning nothing.

Find this useful? Read more here:

• Can you protect your wealth from inflation?
• 10 reasons why stock market highs should not be feared
• Creating opportunities from the challenges of the investment landscape
• Thematic investing - is it the best way forward?

If you want to find out how we can help you with any aspect of your investment management, please get in touch to arrange a complimentary initial consultation today.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.