GLOBAL MARKETS
It seems remarkable that equity markets as high as they are. The risks facing investors cannot be argued to have diminished much over the last month but one would not know it from a look at headline indices. Hopes of a swift resolution to the war in Ukraine have dissipated and an ongoing conflict would suggest more disruptions to supply chains in key commodity areas. The EU is reported to be edging towards an embargo on Russian oil which will potentially exacerbate the energy and cost of living crisis further. Central banks – led by the US Federal Reserve – are becoming more hawkish and although there are hopes that inflation will come down later in the year the “transitory” claims of last year seem almost ridiculous now. Slowing down the economy sufficiently to reduce inflation in the face of supply side issues could become a cure worse than the disease and a recession is now a realistic prospect in the next 18 months. So, equity markets must be benefiting from the TINA phenomenon – There Is No Alternative. Certainly, the bond markets are not looking especially attractive and if we are going to see the rate rises that are being flagged, it could be that a grind down in fixed income prices is inevitable. Other alternatives do not seem to offer much of an alternative for most, though real assets and gold continue to be important in this environment in our view. It is an exercise in cognitive dissonance to look at the surveys of global investors – almost uniformly bleak – and then to see how relatively unscathed equities (collectively) have been. It feels risky to place too much faith in TINA – if we get a downturn, equity markets are very vulnerable at these levels and the exclusion of other asset classes including cash will look to be very unwise. The environment is incredibly treacherous at the moment, and it is hard to argue that complacency has not set in amongst some investors. Pockets of equity remain attractive; it is important to be more selective than ever and exposure preferences will shift as the uncertain macroeconomic backdrop unfolds.
JAPAN
One of the many extraordinary price moves in markets of late has been the fall in the yen. Normally a currency which benefits in times of stress due to it being perceived as a safe haven, the Japanese currency has weakened dramatically against the dollar and other leading currencies due to its monetary policy diverging from the rest of the world. As others move to tighten policy, Japan is still in relatively loose policy mode. The country is also running a widening trade deficit, not least because of its slowing exports to China, which magnifies the dynamic. Typically, a weaker yen has been something pursued by the Japanese authorities as it was seen as a means of helping the country’s exporters but the fact that it is now increasing component and input costs for Japanese companies means it is a threat. Japan has not seen the inflation which other countries have (despite the dependence on energy imports) but a weaker yen will start to impact in this area and will affect the Japanese consumer. Clearly inflation has been something actively pursued by Japan for some years but when it arrives it might not be seen as attractive as first thought – be careful what you wish for and all that! Japan remains cheap but we are discussing current exposures and whether changes need to be made to our positioning.
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