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Equity perspectives
Jeremy Richardson, Senior Portfolio Manager for Global Equities, observes how not all news has the power to shape markets and cautions investors against letting headline anxiety prevent them from participating in a much more powerful wealth creating dynamic.
Since the first newspaper was printed, there has never been a day when there hasn’t been news. There are always headlines. But looking back, there have been comparatively few episodes of lasting investment significance. Candidates that most might agree on would include the dot-com bubble, the global financial crisis and the post-pandemic recovery.
Each of these changed the way in which capital markets operated.
The dot-com bubble drove share prices based upon hope and new methods of business analysis that emphasised customer recruitment over cash generation. Many of the ideas were justified in time, but capital was permanently destroyed when it proved unable to sustain itself.
The global financial crisis forced investors to face the uncomfortable possibility of a broad-based breakdown of the financial system. Queues outside gold merchants and bank runs had not been seen since the 19th Century. Return of capital became more important than return on capital and it was only emergency policy measures that averted a global depression.
Those policy measures created ‘the Great Moderation’ that followed – a remarkable episode for being a period of unusually low financial stress. Low interest rates were intended to anaesthetise the economic patient and push capital into riskier investments. But low rates dampened forces of creative destruction and deadwood accumulated in the economy.
Policy had not long begun to normalise when the global pandemic saw a return to emergency easing to preserve lives and livelihoods. But it was the exit from the pandemic when demand bounced back and supply struggled to keep up that caused the most stress. 1970s-like inflation took capital markets by surprise requiring investors to rapidly readjust.
Where are we now? Inflation is generally back down to within striking distance of central banks’ targets. Small positive real rates of interest are restored. At last, this feels much more like textbook equilibrium than any of the periods arguably since before the dot-com bubble. This should generally be welcomed by investors.
So why aren’t investors feeling happier? Judging by the news there is still a lot of concern and hand-wringing over the path ahead.
This is quite normal. There has always been a steady procession of other stories to attract and distract attention. At various times over the last twenty years column inches have been written about energy prices, tariff policy, regional conflict, elections and governmental budgets. They were all considered important and, to be fair, just because they didn’t impact global markets significantly doesn’t mean that they couldn’t have given a different set of circumstances.
Investors certainly shouldn’t ignore the world around them. Any particular news story has the potential to grow or be seen as part of a broader context. A glance at recent headlines in the financial press reveals issues relating to government debt, rising bond yields and political discord that all have the potential to cause unwelcome volatility.
Yet it would be a mistake for investors to obsess so much about what could happen that they are frightened into inactivity and miss out on probably the best value-creating opportunity there is – investing in great businesses.
Such businesses combine labour, capital and innovation to add real value, not just for their owners but also staff, suppliers and their communities. This value creation is a powerful dynamic that drives economic improvement and progress. Despite all the newspaper headlines, over the last 20 years, we have witnessed business innovation that has brought us dramatically improved cancer care, connected cloud computing that has democratised knowledge and improved mobility with electric bikes, cars and taxi services. We no longer have to queue for tickets, cash cheques, feed parking meters or print camera film. No longer do we have to struggle getting the song lyrics back into the CD case and we can communicate easily with friends and family wherever and whenever we want.
But progress won’t stop here. Businesses today are working on products and services for the future: AI personal assistant tools; anti-obesity pills; cheaper cleaner energy; efficient digital payments and healthier foods. These are just some of the opportunities that have the potential to add value for customers, communities and, if they choose wisely, investors. But only if they put down the newspaper to see the bigger picture and take the first step.
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