Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 459

Is the investing landscape really different this time?

Everyone knows that the four most dangerous words in investment are ‘This Time It's Different’. Sometimes, it is. More often, things end up much the same. The challenge is knowing which it will be.

My investing lifetime has witnessed some seismic changes and the associated market reactions to them. The dot.com bubble and the financial crisis have been the most striking examples. In both cases, there was no shortage of people claiming to spot the end of one era and the start of something quite different. Very often during the 40 years from the end of the 1970s until Covid, the pre- and post-crisis worlds didn’t look so very different.

So, my instinctive response to an investment bank research note arguing that the pandemic has changed everything is scepticism. This reaction is always magnified when the word ‘postmodern’ is thrown into the headline for effect. For the same reason that you don’t ask a barber if you need a haircut, you might beware of asking Goldman Sachs if you should be ‘positioning for secular change’.

Highlighting four ways markets have changed

But I’m being a tad unfair. The note does highlight four important ways in which the past two years may have radically altered the landscape for investors. Only time will tell whether this necessitates an overhaul of our portfolios, and it would be great if we could wait and see.

Unfortunately, that isn’t how investing works. In the absence of a crystal ball, we have to judge now whether the changes are as drastic as billed - and act accordingly.

No surprise about change number one - the re-emergence of inflation after a long hibernation. Arguably, it was tamed by Fed chairman Paul Volcker in the early 1980s and kept in its box for 40 years by a fortuitous sequence of events that included the de-politicisation of monetary policy in the 1990s, the emergence of China as a source of cheap labour from 2001 and finally the deleveraging and demand shock caused by the financial crisis in 2008.

The pandemic brought this happy run to a halt, with households buoyed by stay-at-home savings and wage support schemes in connection with coronavirus lockdowns, and the inflationary impact of gummed up supply chains and the war in Ukraine more than offsetting the initial fall in demand during lockdown. Central banks are now running to catch up with the potential wage-price spiral that threatens to lock in inflationary expectations. We have been here before. In the late 1960s inflation was not a problem until it was suddenly a big one. And investing in an environment of persistent inflation is clearly going to be very different from what served us well during four decades of relentless disinflation.

Change number two was in evidence well before Covid, but the virus and the war have accelerated a process that was already underway. About the same time that inflation was being Volckerised by the Fed, governments on both sides of the Atlantic were setting in train another revolution. The era of deregulation and privatisation may look as dated as big hair and shoulder pads, but it took a pandemic and war to confirm the fragility of the globalised economy they enabled. Localisation, resilience, and national champions will be the successors to complex, interconnected systems that require everything to go right without fail and which have let us down when that happen.

The third change highlighted by the Goldman Sachs note is related to the first two. Most of the past 40 years have been characterised by cheap and abundant labour and commodities, which removed the need to invest in greater efficiency that was one positive outcome of the shortages and high cost of both of these in the 1970s. The move from global to local will make labour markets ever tighter in future while it will take years to repair the lack of investment in commodity production, even assuming the ESG agenda allows it. For investors that means taking a much closer look at companies’ exposure to energy and labour costs, because the winners going forward will be those less affected by these inputs and those helping other companies to mitigate their impacts through technology and other efficiency measures.

Change four, and the one that may turn out to be the most consequential for investors, is the political shift from small to bigger and more interventionist government. We have moved a long way from Ronald Reagan’s assertion that government is not the solution but the problem. And from the government surpluses that this hands-off approach enabled.

Here, too, the pandemic has been more influential than the financial crisis, which also initially prompted higher government spending but then replaced it with austerity thanks to a belief that bailing out banks was a form of moral hazard. There has been less squeamishness about pandemic-related spending and the habit may be hard to break in an era of more overt populism.

What about war, decarbonising and energy security?

Social and welfare spending is likely to be just the start of it. The new Cold War ignited by Putin’s aggression in Ukraine has encouraged governments to seek to increase defence spending and they have been pushing on an open door. President Biden secured a bigger defence package than he first asked for after both sides of the House thought he hadn’t gone far enough. Germany’s defence U-turn has been broadly welcomed at home.

And that’s before we have even started to talk about the twin imperatives of de-carbonisation and greater energy security. Put this all together with an older fixed asset base than at any time since the 1950s and there may be a capex boom in years to come.

Does this alter everything for investors? Are we really entering a new postmodern era? Should we let our friends at Goldman Sachs reposition our portfolios for secular change? That depends whether you agree that it really is different this time.

 

Tom Stevenson is an Investment Director at Fidelity International, a sponsor of Firstlinks. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website www.fidelity.com.au.

For more articles and papers from Fidelity, please click here.

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

 

RELATED ARTICLES

When is the right time to pull the plug on an investment?

How to invest in funds for free (almost)

The when and why of four million Australian retirees

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Retirement

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Shares

On the virtue of owning wonderful businesses like CBA

The US market has pummelled Australia's over the past 16 years and for good reason: it has some incredible businesses. Australia does too, but if you want to enjoy US-type returns, you need to know where to look.

Investment strategies

Why bank hybrids are being priced at a premium

As long as the banks have no desire to pay up for term deposit funding - which looks likely for a while yet - investors will continue to pay a premium for the higher yielding, but riskier hybrid instrument.

Investment strategies

The Magnificent Seven's dominance poses ever-growing risks

The rise of the Magnificent Seven and their large weighting in US indices has led to debate about concentration risk in markets. Whatever your view, the crowding into these stocks poses several challenges for global investors.

Strategy

Wealth is more than a number

Money can bolster our joy in real ways. However, if we relentlessly chase wealth at the expense of other facets of well-being, history and science both teach us that it will lead to a hollowing out of life.

The copper bull market may have years to run

The copper market is barrelling towards a significant deficit and price surge over the next few decades that investors should not discount when looking at the potential for artificial intelligence and renewable energy.

Property

Global REITs are on sale

Global REITs have been out of favour for some time. While office remains a concern, the rest of the sector is in good shape and offers compelling value, with many REITs trading below underlying asset replacement costs.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.