Q1 Investment Update – Stagflation?

As we said last quarter, market returns have been extraordinary for over a decade now. Even a portfolio only 60% allocated to shares and 40% to bonds would have produced an 11.1% return each year over the last decade (9.1% after inflation). In fact this is the sort of asset allocation that the majority of our clients, and investors more widely, hold. One of the leading global asset
managers, Vanguard, are now predicting returns in the next decade of half of the gross number of 11.1%. What makes this even worse is that inflation might take a good chunk out of the remaining half.

Quarter 1 of 2022 showed us how this might play out in markets, with the FTSE All World share index down 5.1% and the Bloomberg Global Aggregate Bond index down 6%. This might not seem that bad, given that we endured the first war on the European continent for 70 years, the biggest commodities shock since the 1970s, volatile Chinese markets and a hawkish approach from the US Federal Reserve. In reality though, both shares and bonds falling in tandem like this was the first time they had declined this much at the same time since these indices were launched.

We have written in the past about the spectre of rising inflation and this is now being driven in the UK by import issues and supply issues. In the UK we grow less than 60% of our food and are only self-sufficient in Lamb and Barley. Ukraine & Russia account for 40% of wheat exports globally, so something will have to give (Ireland has asked its farmers to plough 30% more land, just for wheat). We also import a lot of our energy and COP26 commitments have been very quickly forgotten in a dash to find oil, coal and gas in this country. We can’t even launch our OneWeb satellites (£400m of
your tax spent so far by the government on this particular white elephant) as they rely on Soyuz rockets. In fact, UK growth is now so low and inflation so high that we could be looking at the much worse spectre of stagflation. Either way inflation of 8% plus this year means potentially an even bigger loss on cash than on shares or bonds.

It genuinely feels like the party of the last few decades might be over and that we stand at a junction. One way lies the path of growing indebtedness and falling living standards for the younger generations as our population ages, the other way lies the path of huge levels of immigration (hinted at on the recent PM’s visit to India) to keep the working population large enough to support our retired population. There is a middle path of managed decline and de-grow which are two euphemisms for pretty horrible living conditions for many people, as the country adjusts economically. None of these options are likely to be politically attractive.

In the meantime the men in expensive suits, are preaching a message of ‘diversification’ into commodities, alternatives and more exotic asset classes. All of which look likely to be more remunerative for them and their tailors than our clients. The mantra remains, invest in as low cost and as simple a way as possible and whatever you do in the coming years, avoid cash at all costs.