Anthony Rayner
Premier Miton Macro Thematic Multi Asset Team
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.
Conventional narrative assumes that price discovery in a capitalist economy is driven by market forces, where supply and demand dynamics are left to operate freely. This is often contrasted to a planned economy, where centralised policy dictates prices, as well as many other features within the economy.
In reality, of course, neither are so binary. Traditionally, across both planned and market economies, central banks have driven the cost of capital and the oil cartel OPEC+ have been very influential as to the cost of oil. Not only are interest rates and the oil price not left to market forces, but they are also two of the most important inputs for economies and financial markets and, crucially, these two policy makers often have opposing objectives. For example, currently, central banks are looking to rein in inflation, while OPEC+ is looking to boost oil prices, a key driver of inflationary pressures.
Furthermore, the degree to which a market economy is driven by market forces or not, changes over time. Over more recent decades, central banks have adopted a much broader tool set and, with that, wider powers, to become the most powerful of actors in financial markets. To the extent that, quite often, weak economic data will be regarded as positive news for financial markets as it means more central bank liquidity. This is a powerful distortion of market forces.
More generally, during the hay days of globalisation, corporates became more and more dominant, whilst more recent years have seen non-corporates become more powerful. Indeed, as the world shifts away from globalisation and towards deglobalisation, market forces have become increasingly dominated by national, or regional governments, and so the use of export controls, tariffs and subsidies has increased.
Applied examples
For example, the US imposed controls of exports on the most advanced types of semiconductors to China in October last year. The move was designed to limit the degree to which China could use advanced semiconductors to progress in Artificial Intelligence, especially where there are military applications. This move was material: semiconductor chips are the most widely traded good globally, have an increasing application across a broad range of sectors and make up a very complex and integrated supply chain
Another example, again from the US, is the Inflation Reduction Act. A significant US$370 billion package, with material subsidies for green tech, designed to challenge China’s footprint in this area, and to promote local US manufacturing. In terms of government intervention, this is a massive philosophical shift for the US, where Ronald Reagan famously quipped, “Government is not the solution to our problem, government is the problem.”
Understanding geopolitics
In the context of “big government”, understanding geopolitics is becoming increasingly helpful, especially how alliances are shifting. Take Saudi Arabia and Iran, who recently agreed to restore diplomatic ties. Again, this shouldn’t be taken lightly. The two countries severed ties back in 2016 and between them are major oil producers, with Saudi Arabia previously sympathetic to the US, for example in helping manage the oil price. The deal further challenges US hegemony in the region as the deal was brokered by China, the largest buyer of Saudi and Iranian oil.
It’s not to make a moral judgement, or even a political one, just to accept that we have much more of a planned economy than many seem to accept. Our aim is to best understand what drives prices of asset classes, so we can best construct global multi asset portfolios, and in this we take a holistic approach. The purists, or fundamentalists, who put their faith in market forces and are blind to their inefficiencies and manipulation will likely be caught out.
