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October Comment: The disorderly uncorking

The global economy experienced a slowdown worse than anything seen in living memory during the pandemic but in the past six months it has exploded into life.

It is to say, the least orderly uncorking process. After months of saving money and indoor life, consumers across the developed world have spent the summer and early Autumn deploying their cash. The proverbial bottle has been shaken, the pressure has built to subaqueous levels and all of a sudden, the cork has popped. Unsurprisingly the champagne has sprayed everywhere.

The current problems we see around us, from supply shortages in shops and at petrol stations to surging inflation is all a symptom of this uncorking. The pressure has undoubtedly been exacerbated here in the United Kingdom by the painful process of adjusting to life outside of the European Union.

As such it is neither surprising nor overly concerning. It will almost certainly pass as the world economy re-builds its capacity. Ultimately, we cannot have a fuel supply crisis forever. Whilst British consumers can, if they wish, fill every room in their house with stockpiled toilet rolls most of us only have one or two petrol tanks to fill up. In the words of the old Persian adage ‘this too shall pass.’

For this reason, your portfolio has remained pointed towards a recovering world over the past quarter. This means that it has been exposed to some of the market volatility that has accompanied this period of uncorking.

The global re-opening brings with it important changes in market conditions. Firstly, it necessitates central banks to begin discussing the withdrawal of their enormous support. Secondly, governments are beginning to remove their pandemic-era support scheme and thirdly we must navigate the realization that the world of work will forever be a little different. All of this brings uncertainty for markets that will lead to short-term falls. However, it is the ability to look through this volatility – particularly when it comes in the classically weak seasonal period of August and September – which is ultimately rewarding for investors.

This optimism though should not prevent us from acknowledging the very significant structural changes taking place in the world, many of which were accelerated by the pandemic. Importantly wages have begun to rise as nations become more reliant on home workers and as immigration slows. China has shifted away from the rapid spread of capitalism as its workforce ages just as central banks and governments are pointing their focus towards sustainability. These powerful forces will ultimately lead, in our view, to higher inflation than we have seen for many years.

Your portfolios are prepared for higher inflation, and we take seriously our responsibility to grow your assets over the medium-term ahead of the real cost of living you experience in your day to day life. To profit in a period of higher inflation it is vital to look to history and understand the patterns that have existed over the long-term, rather than just assume that the winners of the pre-pandemic period will continue to win.

History teaches us that in such an environment it is vital to hold a good spread of shares exposed to a variety of market factors and to avoid taking the risk of owning many expensive long-term bonds and cash which will lose money in real terms if inflation is higher. Ultimately the asset class that has always coped with higher inflation, and has seen off all comers to replace it, is shares. Keeping faith in equities through the ups and downs could prove vital in the years ahead.


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