GOOD COP BAD COP!
Tuesday 30th November 2021
The unfortunate arrival of the new Covid variant Omicron led stock markets lower but given the intense global focus, more should hopefully be known in a relatively short time scale.
At the moment, financial markets are viewing the evolving situation with caution and we have to hope the vaccines continue their work and that the reports of mild symptoms are borne out. If so we should be back to focusing on inflation, interest rates and let's hope the whole climate debate and Cop26 action isn't lost.
An annual event of importance for us, is to visit and meet personally with the managers of the funds we recommend to our clients, which we did last week. That personal face to face approach is the heart of our business. Whilst initial data research certainly counts, in the final analysis, nothing can replace a face to face discussion, meeting with those that manage the money and see as a business, how seriously they take us and our clients.
So what did we learn?
Importantly we are very comfortable around our recommended fund managers and were met with an enthusiasm, conviction and expertise of those we saw. There were some common themes of Inflation, interest rate rises, market outlook and of course, Cop26, all having a slightly different view. Inflation and interest rate rises are interlinked and have been a recurring theme this year. How much of the inflation will be permanent and how much temporary? The Central Bank view has been that of temporary as they don't want to choke off growth by increasing interest rates too soon and by too much. The most recent elevated inflation readings of 4.2% in the UK and 6.2% in the US seem to settle the argument in favour of being more permanent than initially expected. The reasons range from labour shortages to transportation bottlenecks, fuel costs and a greater demand for goods than supply as consumers have more wealth. Indeed 12 Central Banks have increased their interest rates this year including New Zealand and South Korea for the second time.
The main concern of all this is wage rises from a much tighter employment market. In the UK after the financial crisis in 2008 there were 5.5 people for every job vacancy compared to today at 1.3. We have almost zero unemployment:
- A consequence of Covid has been the reduction in the actual participating workforce. In the USA for example approximately 4.2 million people had left the labour force since the pandemic started. The thought of returning to the office and the daily commute may seem unpalatable for many, whilst financially (with surging stock markets having boosted pension plans), early retirement may seem a very attractive option. Ironically we have experience of someone retiring early due to their employer's policy of "no office return" and the thought of working from a bedroom on a laptop was just too depressing.
- Remember though that technology advances are ever more rapid and will drive down prices. Linking to Sustainable investing, think of the falling costs of renewable technologies such as solar panels and onshore wind farms falling in costs from 2019 to 2020 by 16% and 13% respectively.
So expect interest rate rises and a reduction in the ongoing money pumped into the world economy via quantitative easing. The question as always: by how much and when? We certainly don't expect by much as the pressures of new technological advances drive greater efficiency.
An area of expected strong demand is linked to the climate agenda, and Cop26 highlighted the accelerated expenditure that will be needed with the biggest capital expenditure programme since World War II. What it means is that choosing good companies to invest in who are taking advantage of the rapidly changing world are key, hence our preference for sustainable thematic investment.
So back to our title as we play the Bad Cop with a very simple view of Cop26 that the action is needed more urgently. Current policies presently in place around the world are projected to result in about 2.7°C warming above pre-industrial levels by the end of the century. When Paris agreements and binding long-term or net-zero targets are included, warming would be limited to about 2.1°C above pre-industrial levels.(Source: climateactiontracker.org). We are currently 1.1°C above, which in 2021 resulted in:
- Record breaking snowfall in Madrid causing £1.2billion of damage.
- Storm Christoph with one of the wettest three day periods on record in the North West of England.
- Cyclone Ana in Fiji with 10,000 people taking refuge in 318 refuge centres.
- Winter storms in Texas with 3.5 mill businesses and people without power and temperatures down to -13°C
- Dust storm in China with the Bejing skyline turning orange with dust and pollution
- Flooding in new South Wales, Australia, with thousands evacuated from their homes
- Cyclone Seroja in Indonesia with landslides and flash floods displacing 22,000 people.
- Record temperature in Moscow at 34.8°C
- Heat dome in the Pacific Northwest United States
- More flooding in both West Germany and China.
(Source: The week - The most extreme weather events of 2021- 1st Nov 2021)
The target is 1.5°C above pre industrialised levels with a need to be below 2°C . So turning to our Good Cop view, and indeed a lot more informative than us, is that of Phoebe Stone, Head of LGT Vestra's Sustainable Portfolios and one of our recent visits being as impressive, knowledgeable and enthusiastic as ever. Phoebe talks of the optimistic target of 1.8°C and the good COP26 has achieved and has produced a 10 minute view of her attendance at COP26 which you may find of interest. Click here to view it.