Are the alarm bells ringing out for 2024?
Ian Rees, Co-Head Multi Manager Funds from Premier Miton’s Multi-Manager Funds investment team, questions whether a Goldilocks Economy is a fairy tale too good to be true.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
And then he sang a song
As we look forward to Christmas festivities and hearing again the UK’s most played Christmas song of the 21st century, the Pogue’s ‘Fairy Tale of New York’, investors might just wonder at the Fairy Tale gift delivered by Central Bankers this Christmas. I am of course referring to the surprising outcome of the US and UK economies continuing to prosper in the face of double-digit inflation and the fastest series of interest rate hikes seen in more than a generation.
At the end of 2022, the geopolitical backdrop of soured relations between China and the US, snarled supply chains as the global economy emerged from widespread lockdowns, together with an oil and energy price shock resulting from the invasion of Ukraine by Russia, resulted in an unwelcome inflationary backdrop. As a result, there was a general belief that this year would see a recession in the US and elsewhere as tough talk by central banks sent sentiment and expectations lower.
I can see a better time
Whilst we have endured a volatile year regarding inflation and inflation expectations, economic growth has so far remained remarkably resilient. With inflation continuing to decline, interest rates appear to have reached their peak (for now?), with GDP data continuing to look resilient (recently reported 3rd quarter US GDP rose by 5.2%). This is being hailed as a ‘Goldilocks Economy’ whereby economic activity has not ‘cooled’ to the degree of inducing a recession, nor are things ‘too hot’ that further rate rises are inevitable. Instead, the output of the economy is ‘just right’ for getting inflation under control without dipping into negative territory.
As a professional investor, I have been fortunate to have enjoyed some longevity in the market. As such, when I hear the phrase ‘Goldilocks Economy’, I am rapidly transported back to 2007. At this time, the global economy was operating in a much lauded ‘Goldilocks’ environment of ‘non-inflationary growth’. Despite the unrelenting construction boom in China leading to a surge in commodity prices and investor enthusiasm for the region, the deflationary force of a significant increase in the global workforce saw an increased supply of goods and services that helped keep inflationary forces in check.
Got on a lucky one
This was a great investment narrative at the time to get carried away with, although the payback in the years immediately following this prior ‘Goldilocks’ period, was anything but a Fairy Tale at the time. So, in reference to the fairy tale of Goldilocks and in remembering the events back then, there are some very useful lessons we can take from them.
Firstly, whilst Goldilocks was able to satisfy her hunger with a bowl of porridge that was ‘just right’, she was not present enough to recognise the dangers of her surroundings. Throwing caution to the wind, Goldilocks was able to feast on the porridge to the point where she needed to rest, relaxing until she fell asleep in a comfortable spot, despite being in a stranger’s house. As investors, we can seek to take advantage of the opportunities presented to us, but we ought to remain alert to the risks of the environment, especially when things are less obvious or certain.
The second lesson is that things will never persist in the state you found them. In the story, the bear’s house only remains empty until they return home. It is therefore best to prepare for change and not believe things will persist indefinitely. The same is true of both economies and markets, too much excess will inevitably lead to an uncomfortable level of restraint. Back in 2007 the panacea of guilt-free growth fuelled an economic and credit boom that eventually resolved itself by way of a bear-market for investors.
The final lesson is that by being fleet of foot, Goldilocks was able to get away – this is a fairy tale after all! In real life, bears are formidable creatures. With an average speed of 56km/hr and the ability to scale trees rapidly, the North American Brown Bear (or grizzly as they are commonly known) would typically make any escape a challenge. Flexibility, liquidity and the ability to act swiftly are all tools the experienced investor can employ to avoid the clutches of bears.
I’ve got a feeling, this year’s for me and you
So, coming back to the reality of today and the Goldilocks economy we face, we can indeed take advantage of the opportunities we see before us (relative and absolute value trades appear plentiful for those willing to look). However, we should be also cognisant of the valuation risk that is around, along with a volatile and uncertain environment that remains difficult to foresee. We should therefore maintain our consideration of risk management,