Hedge Clippings | Friday, 15 October 2021
Headwinds, Tailwinds and Crosswinds.
In line with the wild weather that the Eastern half of Australia has endured over the past few days, this week Hedge Clippings thought we'd consider the factors presently governing markets - namely the macro headwinds, tailwinds and crosswinds facing the global economy.
For the past decade or so these have mainly been tailwinds: The growth of China, low interest rates, low inflation, QE, and massive liquidity providing easy credit, both to business and the consumer. Add the tailwinds of technology, and markets have benefitted from investors who have been happy to ignore record valuations, which by any historical standard have been stretched.
COVID created a storm - or at least a crosswind. However, looking forward there's likely to be a post COVID led recovery, partly as a result of stimulus, and partly through pent up consumer demand and accumulated bank balances, which will add to the above tailwinds, at least for a time. Luckily for treasurers globally that the massive increase in COVID induced government debt coincided with historically low borrowing costs.
And so to headwinds: Paradoxically some of these are the reversal of some of the tailwinds. China is slowing and facing a credit/property crisis. Inflation is emerging, partly as supply chains become stretched. Central banks are only months - or less - away from reducing their bond buying as inflationary concerns increase, and balancing that tapering, and keeping markets stable at the same time, will be a high wire act at best. Interest rates are as low as they're going to be, and can - or will - only increase in due course, which in turn will impact valuations.
Crosswinds are more difficult to predict, but as any student of aviation would know, can be more devastating, as COVID showed. China manages to feature as both a tailwind and a headwind, and depending on their actions (as opposed to intentions) regarding Taiwan, a major potential crosswind. As does climate change, although some would argue this should fall into the headwind category.
This week we spoke with Charlie Aitken about some of the challenges the markets are facing as a result of these winds. Charlie's an optimist, but a realistic one, and feels the markets are facing a few choppy months leading towards the end of the year. His solution is to buy good companies propelled by tailwinds, and less likely to be affected by crosswinds. Meanwhile, Damen Purcell spoke with Richard Ivers of Prime Value about the end of the market's positive 11 months run, and where he thinks it might head from here.
And while on the "climatic" theme, Scomo has his own wind issues to manage. Go to Glasgow (something most Englishmen have tried to avoid over the years) and come face to face with the global (and Royal) climate backlash, or stay at home, but still cop the criticism from afar? Or will he embrace, (or at least accept) climate change and seek to address it, and in so doing create massive headwinds from his coalition partners and the coal mining industry?
Who'd be a politician?
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