Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
From geopolitical tensions to natural disasters and Black Swan events like a global pandemic, there is always plenty to occupy the minds of investors.
So, with Halloween just around the corner, we asked seven Elite rated fund managers, what is scaring them most today when it comes to our investments.
“This Halloween, markets seem to be in the midst of their own horror movie. In the opening scene, everyone is focused on what this energy crisis means for inflation, but very few people are considering what it means for growth.
“Big jumps in energy prices are normally associated with major growth slowdowns about six months later, where the doubling in oil prices in the first half of 2008 is one of the best examples. Markets are pricing in lots of inflation already, but risky assets aren’t remotely contemplating the growth hit.”
“There are two issues that concern us particularly. From a sustainability perspective, a failure to implement a credible and globally co-ordinated framework to achieve net-zero by 2050 or before. We think the upcoming COP26 conference will be critical in this context. If this opportunity is wasted, the goal of limiting global warming to 1.5 degrees looks increasingly difficult to achieve.
“From a pure market perspective, the risk of central bank error is our biggest worry. Tightening monetary policy too aggressively could significantly impact the global recovery in 2022 and release the spectre of stagflation.”
“What scares me most at the moment? Raw material price rises. The increases have both been monumental (certain steel grades are up +145%) and scope – ranging from sugar to coffee to gas, with the latter’s associated knock-on effects into electricity and aluminium.
“Some companies have already warned of profit problems – the wind turbine manufacturer Siemens Gamesa is one. It hedges on a rolling 12-month basis, but its projects have longer lead times. Others will gain on a relative basis. Scandinavian electricity prices have hardly risen, as the region has such a strong bias to hydro generation. Yet another reason for our strong overweight there.”
“For the rest of my career, I believe the biggest risks to equity markets will be environment related, arising from more frequent environmental disasters but also from the very measures intended to lower the risk of them occurring.
“The trouble is many low carbon-producing companies cannot survive / thrive without relying on other companies to be the ‘sinners’ on their behalf. So, there are big economic risks that come with trying to tackle this problem, as well as with not tackling it.”
“One concern we have is the impact of companies making significant changes to their supply chains in reaction to the disruption caused by the pandemic. Global businesses are looking at sourcing what they need closer to home, rather than shipping vital components all the way from lower-cost economies such as China.
“That should provide them with greater resilience and control, but it will result in permanently higher costs, which could have a significant impact on the profit margins of some of these companies. Fortunately, well-financed growth companies with a strong competitive edge and pricing power will be in a better position than most to offset higher costs by passing them on to their customers.”
“The biggest fear for bond investors is what interest risk might. Sterling yields have been volatile in the last few weeks, with a bigger gilt sell-off than was seen during the flight to quality in March last year. One way to mitigate this risk is to ‘shorten duration’ – invest in bonds that have less time to maturity.
“This is what we’ve done in the fund and the index is roughly 60% more sensitive to interest rates than we are. That’s a big difference and, with rate risk being punished in the last few weeks, it results in significant outperformance for the fund.”
“The situation around climate change remains extremely concerning, with the recent report from the UN’s Intergovernmental Panel on Climate Change (IPCC) heralded as a code red for humanity and expectation increasing ahead of November’s COP26 Conference in Glasgow.
“We have seen many such events experience varying degrees of success in the past but, however COP26 plays out, we will continue to see huge disruption and opportunity as the world grapples with the energy transition. We continue to believe materially reducing emissions will impact the whole economy, including our energy system and how we heat and cool buildings, driving transformations in transport, industrial processes, agriculture and land use.”