Active investment commentary & analysis

Often great events do not set the world on a new course

Amidst turmoil, gaining perspective is difficult. History helps: often great events do not set the world on a new course, but highlight and magnify existing undercurrents. The virus challenges global supply chains, but this follows President Trump’s trade wars and an established drift to populism and nationalism. Amidst a sharp deceleration of the global economy, stresses in the banking system have surfaced. But, an extended boom primed by easy money had already created some bad practice and excess in credit markets. It has taken the crisis for the risks in high yield bonds that were bubbling under to be recognised. Big trends are in place. These should drive not only changes in business models, but in portfolio strategy.

In terms of bank risks, deflation potential, and manufacturing export emphasis, it is not the UK but the major economies of the Eurozone that stand out. This heightens short term risks for those countries, and may point to a poor fit with the evolving global political and social landscape. Premium ratings will be merited in future for economies that are more flexible, and agile businesses within them.

Investors should recognise the value of disruptive strategies and dynamic economies with clear political leadership. Global businesses should think more about resilience; shorter supply chains and lower energy use. Brexit will drive the UK towards further internalisation of some key sectors, leading to regeneration and rebalancing of the economy, with opportunities for domestic sectors. In a world where deflation is a real possibility, a degree of wage growth inflation in the UK may be stabilising. International investors who sold out on Brexit concerns, may begin to see the differences between the UK and Eurozone as a positive.

Stockmarkets are often driven to extremes in both directions. How a portfolio emerges from this depends on its construction and the research that underpins that. Trading amidst heightened fear rarely helps.