Neil Birrell
Premier Miton’s Chief Investment Officer
Time flies
At this time three years ago, I would have been sitting here writing that the outlook for the world economy was somewhat grim and that expectations were for a marked economic slowdown and probable recession. Those expectations were more driven by the overall economic backdrop than the risks from COVID which, at that point, were a little understood, nascent threat.
Well, recession did arrive. The impact of COVID threw us into an economic collapse not experienced for centuries. Through the early months of the pandemic these notes did not contain much good news, but it was not all bad news and, from a financial markets perspective, it was important not to get too wrapped up in the negativity. Therefore, I wrote “Reasons to be cheerful, part 1” followed by parts 2 and 3 in subsequent months. It now seems appropriate to write part 4.
Reaching for the dictionary
Other than the world war years, it is hard to imagine a period that has been as tumultuous as the past three years. The shock and desperation during the worst of COVID, the reopening of society and the economic consequences, followed by the invasion of a sovereign state by an aggressor within Europe and booming inflation and rapidly rising interest rates, left us reaching for the dictionary to find suitable adjectives to describe such times.
When it came to economies and financial markets there was a clear winner for all you crossword fans; unprecedented. But it was closely followed by; amazing, extraordinary, astonishing, remarkable and volatile.
What we would give for 2023 to be; predictable, conventional and maybe even boring. Unfortunately, that seems unlikely.
There may be trouble ahead
Before moving onto the cheerful part of this note, I need to take a step back. I spend much of my working life worrying. There is a long list of topics, but they can be put into a small number of categories; the investment outcomes Premier Miton are producing for investors in our funds, the economic and financial market outlook and our business and people. Although, they are all interlinked to one degree or another.
For this purpose, I will just consider the outlook for economies and markets; there is plenty to worry about.
In the world’s second largest economy, China, the explosion of COVID cases led to zero-COVID rules being applied by Xi Jinping and his government. China has been the engine room of global economic growth for a long time now and the prospects for the economy have taken a big hit, which will have ramifications for the rest of the world as manufacturing output falls and supply chains contract.
In Europe, the quest for growth has been failing for some time and the cycle of rising interest rates and inflation has knocked prospects further. Meanwhile, at home, dire public finances are the latest dampener to growth and headlines about how the tax burden is going to rise significantly may only make matters worse.
Overall, the economic outlook is not great for the coming months, which has been the case for some time and explains the disappointing returns in 2022 for the major asset classes of bonds, equities and property across most regions.
Let’s get to the good news
Let us start with the country where things are worst, China. There is clear and positive movement in their approach to COVID restrictions, with the disease being downgraded in classification, international and national travel restrictions being eased and lock down measures relaxed. It will not be instant, but it is an important change for the Chinese and global economy.
The US is the world’s most important, dynamic and entrepreneurial economy. It usually comes out of difficult periods stronger and more quickly than anywhere else and with inflation looking like it may have peaked and interest rates expected to hit highs in the first half of 2023, the outlook is good.
I think one country that could be a major driver of growth in the coming years is India. We do not write about it much, but with a population of over 1 billion, the economy is now larger than that of the UK, in fifth position globally. A State Bank of India report said India will surpass Germany in 2027 and most likely Japan by 2029 at the current rate of growth. The scale and speed of this growth would have a significant positive influence on the global economy.
We should also not forget some of the key drivers of economic growth over the last few years which have not gone away, indeed many are accelerating; transition from fossil fuels to affordable and clean energy, digitalisation and greater healthcare for growing and aging populations, whilst sustainability in its widest sense will generate growth.
The changing long-term trends in society will require massive investment from the public and private sectors and stimulate economic activity. Interestingly, some of these, in particular the ongoing use of technology, can help slow inflation. Technology has a long track record of making products and processes cheaper, faster and better. Digital transformation and adoption of technological solutions can be used as a long-term strategy to combat higher inflation by increasing productivity through automation. More good news!
So, what is the good news when it comes to financial markets?
I ran through my thoughts in this note last time. To summarise; in my view, areas of the bond market are now providing attractive returns for the level of associated risk being taken and equity markets could struggle in the short term but look attractive in the long term.
In these notes I tend to refer to “financial markets” and “assets” and their prospects, but it is particularly important to remember two things. Firstly, financial markets and asset classes are not homogeneous, they are deep, broad, highly diversified and provide all levels of risk and return potential.
Secondly, we, Premier Miton, are active fund managers which means the funds we manage do not replicate any market, asset class or sector; they are very different, focusing on where we see the best opportunities. Furthermore, this means we will adjust the funds’ investment portfolios on an active basis, as conditions change.
I have been struck over the past few weeks by what our fund managers are telling me they are seeing. The managers of our US equity funds recently came back from a trip to the US to meet a large number of companies over there enthused by the new opportunities they had found and the prospects for the US overall.
The team that invests in property companies in the UK and Europe have been under pressure in 2022, due to challenges within their asset class, but see valuations of these companies at lows only seen in the recession of the 1990’s and during the global financial crisis. In the UK, the fundamental outlook may not be too rosy, but our fund managers are genuinely excited about what the next few years have in store for their investments. I could go on, so I will; I have not seen our bond experts enthuse about their asset class before, now they will not stop!
The returns provided by the broad group of funds with a strategy based on Environmental, Social and Governance (ESG) or sustainable criteria suffered in 2022 after very good years in 2020 and 2021. These investment strategies can be diverse in nature, as the definitions of their investment universes differ. However, if taking a clearly defined and established approach to this strategy, as we believe we do, then the long-term opportunity is another area to feel positive about in my view.
I think that gives you some reasons to be cheerful about the outlook for financial markets. But, I could be wrong and you should take both financial advice and a long-term view when investing your money.
The last (cheerful) word
To those of you who read these notes regularly, thank you for your interest and indulgence. To all of you who have got this far through this one; here is to 2023 being predictable, conventional and maybe even boring, and hopefully profitable.
