Investors will have to navigate high inflation, rising interest rates as well as shifting geopolitics and technology if they hope to maximise portfolio returns over the next three to five years, says Hywel George, the director of investments at Old Mutual Investment Group (OMIG).
George said that global financial markets are presently hamstrung by levels of inflation last seen in the 1970s.
“In the 1970s, we saw oil price shocks – we have oil price shocks right now; the 1970s were characterised by social unrest and strife, we have that now; and the US Federal Reserve ran a very loose monetary policy for too long during the 1970s, which exactly mirrors what we see today,” he said.
The investment expert said that the US Federal Reserve’s approach to the 2020/21 Covid-19 pandemic directly contributed to higher rates of inflation adding that the Fed kept interest rates low for too long.
He said that the vast amount of money fed into the economy created asset bubbles and excess demand in the system.
Domestically, the latest’s consumer inflation (CPI) data is set to be released this Wednesday (24 August). The Bureau of Economic Research (BER) said it expects headline CPI to increase significantly for July.
“Our forecast is for an increase of 1.5% month-on-month, which will push the annual rate up to a projected 7.8% from 7.4% in June. This is bang in line with the market consensus. Core CPI is expected to increase by 4.5% year-on-year, up slightly from 4.4% in June,” it said.
George said that the inflation scenarios abroad and as seen domestically, paired with the conduct of the Federal Reserve, would lead to both inflation and interest rates going higher than they have been during most investors’ lifetimes.
“If central banks want to bring inflation down, they need rates to be much higher – therefore, we expect the US and other developed markets to hike interest rates significantly from current levels, which is going to hit segments of the market hard,” he said.
Shifting geopolitics and technology
Investors have already experienced the shock of higher interest rates in the sharp drop in equity market valuations over the past six months. Global equities are down 20% over the first six months of 2022, while the technology-heavy Nasdaq is down 30%, making it the worst opening half year for markets since the 1970s.
“What has surprised us, though, is the pace at which these events have unfolded, which talks to how swiftly global events get transmitted through markets these days,” said George.
He said Old Mutual expects stocks to pull back, specifically technology stocks.
Regarding geopolitics, George said that there had been a global power shift from the US to China, which is set to play a major role in worldwide investment. In terms of technology, while technology shares have recently suffered a big sell-off, there is little sign of the underlying pace of technological investment slowing.
“What makes this decade so exciting is that so many emerging technologies are both growing exponentially and converging with each other to accelerate each other’s growth.”
To best adapt to higher inflation and interest rates while taking advantage of geopolitics and new technology, George said that the gold standard always stands the test of time when it comes to inflation alongside real assets such as forestry, infrastructure and selected real estate investments.
In terms of geopolitics and new technology, he said that seeking out companies that service China and its growth in Asia from countries could be advantageous.