Reasons to be cheerful

With a tough winter approaching, our head of multi-asset investments David Coombs has dusted off the barbell. All the exercise has made him chirpier than usual.

8 September 2022

We have just experienced an amazing or catastrophic summer, depending on your view of the world or reliance on our usually more temperate climate. One of long, warm evenings and cold drinks, but also one of parched gardens and no running water for some.

I suspect most of us look forward to a more normal winter so reservoirs will fill once again and our land returns to its normal green and pleasant state. However, at the same time, all anyone can talk about is how such a normal winter will be a bleak one of extortionate power bills. Cold temperatures and higher energy costs would be a mean combination, creating real harm for the less well off.

It would also be a lethal combination for many businesses whose customers will see a significant reduction in their spending power. Our newspapers are full of commentators rightly flagging these problems, yet it does leave you with a feeling of inevitable decline.

Now, we have seen enough false boosterism over the past few years without any hard supportive evidence. And I’m aware fund managers are often overly optimistic to encourage investors to keep calm and carry on (I’m usually the sceptic in this situation). Yet, given how universal the predictions of doom have become – and knowing full well that any positivity might be viewed cynically – I thought I might try to search for a positive outlook. Especially given reports from Craig Brown, our senior investment specialist, recently back from a vibrant and upbeat America.

Doubting the doubters

First things first: I think the next six months will probably be marked by plenty of bad news and volatility. That’s why we are taking a cautious approach in our multi-asset funds at the moment. However, frankly, it’s all too easy to be cautious right now as nobody really questions you. So we have to question ourselves.

Normally, we challenge our strategy about what might go wrong. Lately, we’ve been challenging our strategy for what might go right. I have already talked about peak inflation in a previous blog, so what else could go right and upend the popular view of doom?

Is it possible that the war in Ukraine will be over by the middle of next year? Clearly, we cannot predict, or even rely on this, but it’s a real possibility. Does Russia really have the appetite to continue this conflict indefinitely? The end of the war wouldn’t immediately allow Russia back into the economic community, but it would be met with relief and also less pressure on agricultural commodity prices as trade routes reopen.

Meanwhile, how long before Europe starts negotiating with Russia to import gas again, regardless of the state of war or peace? The cynic in me says quicker than you think.

Keep the politicians busy

I think we might dare to consider the end of COVID-19’s major impact on Chinese economic activity in 2023. No more lockdowns and a recovery in consumer demand, manufacturing output and overseas travel. Of course, arguments about Taiwanese sovereignty and President Xi Jinping’s switch to the language of “common prosperity” ensures the discount on Chinese stocks relative to other markets has widened for now. But it’s possible that he retreats somewhat from further antagonism on either front, as he’s got enough on his plate with a property crunch. He will need to keep the population on side if he wants to minimise the risk of a move to replace him from within the Chinese Communist Party.

The US midterm elections take place in November. The Democrats could lose seats and control of the Senate and/or House of Representatives, which would mean less political impact on the economy – usually a good thing. Of course, attention will switch to the return of Trump, which will keep the political classes busy, to say the least, for the next two years until the next presidential election. That would allow corporate America to get on with what it does well: innovation and high returns on capital invested. This, coupled with a shallow recession, could mean the US equity market once again surprises on the upside over the next few years.

Then we have Europe. Nope, I have run out of positivity. It looks bleak for 2023. Decades of poor energy policy, a lack of coordinated fiscal policies, a one-size-fits-all monetary policy and a suspicion of corporate profits makes it hard to see any sunny uplands at the moment. But imagine the relief rally if something does happen to come along...

One of the advantages of being a multi-asset manager is that we don’t have to ‘big up’ our own asset class to gain interest. Which at the moment is just as well. We are once again raising cash levels in anticipation of further short-term volatility, given macroeconomic headwinds; however, we are feeling a little more optimistic on a 12-month view. For now, we’re trying to ensure we have the optimal mix of stocks, bonds and diversifiers to take advantage of any positive surprises. Yes, the old barbell is back.

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.


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