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Ryan Harrison, Head of Wealth Management Canaccord Genuity Wealth Management Jersey
It might not have felt like it at the time, but investors can look back on the 2010s as a “golden age” for investment. Sure, there were intermittent crises along the way of various European varieties, as well as wobbles in the middle of the decade in China, but by comparison to the “Turbulent Twenties” we are enduring now, the life of an investor was “easy”.
It is hard to overstate how much has changed in the last few years. Let’s put aside the one-off cyclical effects of the COVID-19 pandemic for now and recognise instead the structural changes that have taken place in the overall backdrop for economic growth, inflation, and interest rates. All three major inputs in to our economic and investing lives have gone from being boring, low, and predictable, to being significantly more volatile.
Asset market returns have broadly gone from relative feast to famine, as the whole raison d’etre for central bankers has switched rapidly from doing all they can to boost asset prices and your own investments, supposedly to create an illusory “trickle-down effect” for the less financially well-off in society, to now being obsessive about quelling the inflationary pressures they themselves unleashed through their unnecessary policies of zero interest rates and quantitative easing (printing money to buy government bonds and creating a swell of liquidity in asset markets) in the post-2008 crisis years up until 2022.
Just as it was a comparatively easy time to be an investor, it was also a very supportive backdrop for companies. With interest rates so low and complacency amongst creditors encouraged by the ever-willing central bankers, it was very easy for companies to get their hands on cheap debt in both private and public markets. So, they obviously borrowed as much as they could, at as cheap a rate as possible for as long into the future as they were able. And who can blame them?
Whilst this might be an overgeneralisation, it was a common trend, but the important factor now is that it has come to a halt, with interest rates rising and debt harder to come by. In simple terms, this will mean that the “easy days” are over, and we will go back to a world where there is greater differentiation between both winners and losers, which should be reflected in a greater variation in profitability at a company level. This should lead to financial markets that are more discerning and, where there is a higher degree of divergence, probably more so in the uncertain environment ahead where price rises and labour costs are already eating in to corporate profit margins. This should, at least in theory, be a successful hunting ground for active management, after a long period where passive or “just owning anything” was the best strategy.
