The Themes of 2019 (Half-year Report)
As ever, a lot has happened in the last six months. The following are my six takeaways from the first half of 2019 that I believe are most likely to influence investors in the months ahead.
1. Sustainability: the defining theme of the year. It has real momentum, with stakeholders involved from across the ice-diminishing piste. The public mood has shifted, with large scale movements tackling plastic and climate change, among other issues. Governments are responding. Most significantly, the UK has introduced a legally binding commitment to achieve net-zero carbon by 2050. Regulators are moving to compel businesses to aid the transition to a low-carbon economy, influencing both asset owners and asset investors. As Mark Carney wrote “this requires a massive reallocation of capital. If some companies and industries fail to adjust to this new world, they will fail to exist”. Future investors may well look back at the advent of the sustainability epoch and quizzically ask “but how were you investing before?”
2. Liquidity (or “The Woodford Crisis”): when things go wrong at high profile companies run by star names, the fallout is widely felt. This is already the case with the Woodford affair, bringing a heightened focus on the relationships between star fund managers, platforms and “recommended” lists. Investors are responding with a greater focus on the liquidity of underlying positons and the oversight and governance provided by company boards and regulators. Such concerns raise questions about that perennial thorn in the capitalist side: the unsustainability of executive remuneration. Why are people at the top rewarded even when things go wrong? The expansion of the gap between executive pay and average worker pay has torn shreds in the social contract. It remains unfixed and will continue to threaten the future of the capitalist model unless shareholders use their voice to vote against unreasonable pay proposals.
3. Politics: 240 characters (the maximum length of a single tweet) now shapes the course of global events. The starkest example of this was President Trump’s recent social media invitation to Kim Jong-un: “if Chairman Kim of North Korea sees this, I would meet him at the Border/DMZ just to shake his hand and say Hello(?)!”. This is the tinder approach to politics, a populism that tricks electorates into ignoring the detail. Swipe to accept. It has profound implications for how we deal with issues (such as those raised in point 1) which require multilateral action over longer timespans than the average political life. The void of political leadership opens the door for the private sector to step up…if it gets its own house in order (as per point 2).
4. China: the advance of populist politics in the West raises the question “is there another way?” Yet in China, the grand bargain between the communist party and the people is threatened. During years of economic expansion, the model works: do as we say and we will lift you out of poverty. But with a stagnating economy – which is growing at its slowest rate in 30 years – is this model vulnerable, particularly as protests threaten to spread from Hong Kong to the mainland? Despite the investment attractions of the emerging economies which are forecast to drive future economic growth, investors continue to be paid for heeding to that old saying: “Don’t bet against Uncle Sam”.
5. Distorted markets: market wobbles continue to be greeted with the soothing words of Central Bankers. This has the “new normal” effect of turning bad economic data into good news for investors. A recent example of the financial market distortion this can create came in the sharp decline in 10-year Greek bond yields, which dipped below those of the US. This, for a country with debts standing at 180% of GDP. In the US, the likelihood that the Federal Reserve will reduce interest rates, despite the underlying growth in the economy, has a distinctly “1998” feel to it. That was the last time that the Fed reversed monetary policy to reflect broader international economic conditions. We appear to be through the looking glass…but for how long have we been here…and how long will we stay?
6. Technology: as the “fourth industrial revolution” progresses, regulation is likely to become a more dominant factor in the management of disruptive innovation. Who will this stifle and who will this support? Facebook’s Vice President of Global Affairs and Communications, the former MP Nick Clegg, stated that the company would welcome greater government oversight “for Facebook and other social media platforms”. This is little surprise. New rules tend to deepen the moats around monopolistic incumbents. Yet is it time regulators took the original Facebook motto “Move fast, break things” and applied it to the large tech firms? Disruptors are the drivers of innovation and growth. To keep this going, incumbents may need to be threatened rather than protected by regulation.
We wish all of our investors good fortune in the months ahead, whatever surprises may be in store.