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“Aren’t you entertained?” asked Elon Musk recently, firing back at a journalist who questioned his serial tweeting and, often, reckless indulgence of the platform. But the billionaire’s quip could easily apply to today’s general state of world affairs: entertaining, yes, but also edgy, agitated and, even downright unpleasant. Toxic stories have led the headlines for so long that most of us no longer blink at the madness.
A quick survey of international news proves the point. The U.K.’s government is providing a masterclass in how not to do politics. Mark Zuckerberg’s pivot into the metaverse has been painful to watch – and has cost him dearly in the real world. Rivian, the high-profile and Amazon-backed electric truck company, just recalled all its vehicles due to a curious defect (“a loose nut,” the CEO said). And, as if Vladimir Putin’s game of global brinksmanship wasn’t enough, the inflation shock is now absorbing almost the entire conversational bandwidth in most countries.
Chaos is apparently the new world order. Coloring within the lines seems so last decade. And, at a moment in time that is increasingly unhinged, history has become an utterly useless guide – leaving investors desperately casting around for a stable forecast.
What on earth comes next? Our investment team has just concluded our 80th quarterly investment forum (yes, some of us have been doing this for a very long time and, yes, some years are more fun than others). As expected during this session, pencils were sharp and eyes were particularly wide open. It should now be abundantly clear that, rather than the last few years being an aberration, we are living through a profound shift in the trajectory of the global economy. And it is a generational shift, on the same level as the rise of Keynesian policies after the second world war or the globalization that gathered pace in the early 2000s.
At the core of this big shift lies inflation. Global prices are now rising at a double-digit pace for the first time in nearly four decades. Many did not see this coming. In fact, a strong consensus in the 2010s held the view that inflation and growth were permanently low for structural reasons. Poor demographics and productivity would keep growth sluggish, while globalization and digitization would keep inflation muted.
This has all been proved wrong. It turns out that the developed world can produce inflation after all. Yes, it took a pandemic to unleash extraordinary actions: bailouts; record stimulus; and a complete shutdown and reopening of the entire global economy. But inflation has arrived, turbocharged by the war in Ukraine.
Yet inflationary impulses also have a longer-running support: a structural rise in government spending and investment. An aging population needs more healthcare services. The West needs to spend more on defense to counter threats from Russia and others. Climate change and the need for energy security will boost state investment in renewables. And heightened geopolitical tensions are leading policymakers to spend more on industrial policy.
On the surface, this outlook of high inflation may seem dire. At the same time, growth is slowing. The IMF forecasts the year ahead will face the lowest growth since 2001. Their chief economist, Pierre Olivier Gourinchas, piling onto the joie de vivre, predicts that 2023 will be the “darkest hour” for the global economy.
All very cheery stuff. And markets have taken note. Wealth destruction in 2022 has been eye-watering. Never mind the complete carnage in crypto (the last spasm of a speculative mania), the wipeout in SPACs (why did we allow profitless companies with no coherent business plans to come to market?), or even the wreckage in lockdown favorites like Netflix and Zoom. The declines this year in a plain-vanilla balanced portfolio have been record-setting: An equally split global stock and bond index has seen the largest ever loss in value, easily outdoing the declines of the 2008-09 financial crisis and the 2020 pandemic.
But financial conditions rarely remain in the same state for long. Market pendulums swing. And, of all the big ideas floating around – recession, deglobalization, energy shortages – none is quite as radical as the concept that markets may now be forming a durable bottom.
Why should we be discussing a new bull market when the outlook seems so bleak? The best answer is that levels of investor sentiment are now consistent with past bottoming processes. Markets do not form tops when investor sentiment is universally pessimistic. Rather tops occur with everyone predicting ever-sunnier skies ahead and partying like it’s 1999. Markets fully discount that view and upside surprises become much more difficult to deliver. By contrast, bull markets are born out of pessimism.
Today, we are facing a panic moment that, on many measures, is far worse than 2008’s global financial crisis. Consumer and business confidence has fallen by the most in a decade. Retail investors have driven record dollars into cash and short-term bonds. Even the pros have run for the hills, with average allocations to cash at the highest since 2001 and allocations to global stocks at an all-time low (hat tip to Bank of America’s fund manager survey).
With sentiment this pessimistic, upside surprises can come from several areas. China, the second largest economy in the world and a crucial driver of global growth, is a case in point. Covid suppression policies have caused severe damage to the most important segment of the Chinese economy: the middle-class consumer. Investors had been hopeful that restrictions would be lifted around the time of the Beijing Winter Olympics last February. Instead, Shanghai saw a brutal shutdown.
Yet lockdowns will not last forever. Hong Kong has seen easing quarantine restrictions in recent weeks. To the extent that Hong Kong is a testing ground before trying new policies on the Mainland, this is encouraging. A reopening China would be hugely bullish for markets and drive outperformance in cyclicals and commodity-exporting emerging market equities.
What about Europe, certainly the region of the world with the bleakest predictions? It would not be an outlandish forecast that they will muddle through the winter with a combination of coal-burning and energy rationing (and an overall relaxation of any ESG considerations).
But looking across the valley, there is a larger trend at play here: The end of the fiscal austerity of the 2010s. I’ll explore that in more detail next time, and outline some important implications for investors.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2022 Super Trends: World in Transition” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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Content © 2022 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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