Have we added too much Marmite?

What has happened to markets in the last year?

Looking back to the low point in March 2020, it is gratifying to deliver more positive news to clients in recent months.

As we emerge from lockdown, growth in asset values has to some degree been fuelled by the combination of many factors:

  • Massive government borrowing funnelled straight into the economy to give it cash flow.
  • Released citizens, eager to get back to normality and to spend their accrued savings and more.
  • Cheap borrowing, with ultra-low inflation rates… well, for now anyway!
  • Central governments in no hurry to control or restrict significant growth following the last year of dramatic falls in Gross Domestic Product.
  • Vaccination success for some nations/areas, but not all, notably Europe.
  • Accelerating investment markets in many areas, fuelled in part by new money because deposit savings rates are hardly viable.

In fact, dealing with the exceptional economic impact of COVID-19 is like cooking on Master Chef with ingredients you have never used before. Everything has been thrown into the mix and you are not quite sure how it may taste, and you worry about having added too much Marmite, but you know ‘the proof is in the pudding’.

The inflation debate

The overarching debate amongst investors at present is the one over inflation and It is clear that inflation is on the way up in the short term. Money printing and lockdown savings are combining with pent-up demand, arming consumers to pay more for goods and services. In addition, many companies also need to restock but supply has been constrained in areas, triggering price spikes as economies re-open.

Central banks have to be careful about how they react to short term rises in inflation, which may be only temporary. Heavy-handed reactions such as increasing interest rates or reducing QE or even increasing taxes are likely to lead to stock market volatility. Fortunately, the banks appear to believe the spike will be just that; the numbers will start falling again as the post-COVID recovery wanes.

For me, it now feels we are very much in a “waiting room”, inflation data is on the way up and expected to rise further; but we are waiting for evidence as to whether it will or not, meaning markets are somewhat nervous. The consensus, however, is positive – as confirmed by the IMF in their April 2021 report (global growth projected to be 6% in 2021) and by the recent Bank of England forecast that the UK economy will increase by 7.25% in 2021.

To worry or not to worry?

A major part of my job is to worry; I was worried all through last year when things were bad and I continue to worry now, when things are much better and further improving. If the most I have to worry about is inflation going higher than expected, then maybe things are not that bad after all as our clients are invested in a diverse portfolio of assets with each asset class impacted in different ways by inflation but taking a medium to long term view and with income being reinvested I am not unduly worried about inflation.

Remember though investments, and any income from them, rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. Come what may the next 12 to 24 months are going to be fascinating to watch unfold and we fully expect a “bumpy ride”.

Now, where did I leave the anchovies?

This article isn’t personal advice.

Innes Reid profile
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