Transcript: The era of big (and growing) government has resumed
David Rindegren of C Worldwide Asset Management says while central bankers fight inflation, governments are fueling it to please voters
- November 1, 2022 November 1, 2022
Welcome to Soundbites, weekly insights on market trends and investment strategies brought to you by Investment Executive and powered by Canada Life.
For today’s Soundbites, we discuss the global economy and the battle against inflation with David Rindegren, head of the global research team at C Worldwide Asset Management. We talked about the biggest strains on global equities, and we started by asking how investors should view today’s uncertainty.
David Rindegren (DR): We think it’s always important to think long term, and perhaps even more important in times like this. It’s a losing proposition to chase shorter-term macro and geopolitical events because it’s so difficult to get them right. But it’s also very important to stay informed about what’s going on — for risk management purposes but also for trying to gauge if what’s happening is turning into a theme, something that’s driving revenues over three- to five-year timespans. And sometimes these themes are actually turning into trends, and that’s a multi-decade development for us. And I think what we’re seeing at the moment, given all the turbulence, is a trend of big government taking bigger decisions in society. All these geopolitical events are just affirming our view that big governments are here to stay.
The biggest factors straining equities.
DR: Yeah, there’s a lot of them this year. So, one would obviously be high valuations going into the year. So, if we take S&P 500 as a proxy for the wider market, it was trading at 23 times this time last year and now it’s less than 16 times. That’s obviously come down a lot but hurt performance this year. Then over-earning from Covid, and that’s not only companies having tough comparables, but also, sales pulled forward into 2020 and 2021 from future periods. Then, we have a big one here: rates rising and central banks tightening. And this does a couple of things. One is direct effect on companies. Then unforeseen effects. So, one example of that would be the MOVE [Merrill Lynch Option Volatility Estimate] index. So, the volatility of bonds. It’s at very, very high levels, similar to the financial crisis. There’s also investment banks that are selling off quite dramatically, Credit Suisse being one of them. So, there’s something going on beneath the surface. Moving down the list, one would also be, obviously, inflation. And just about a year ago everyone thought this was transitory, but we’re still seeing the impact of that inflation. Political turbulence is another one this year. We think we’ll see much more political instability, which is not good for asset prices. And not only in Europe but across the globe. And, finally, geopolitics, perhaps the effect with the longest duration in some sense. We have the war in Ukraine. China is under pressure from demographics, a housing bubble that’s bursting, Covid lockdowns, and the large fear here is of a Chinese invasion of Taiwan at some point, or perhaps a naval blockade. So, there’s several geopolitical events that’s going on this year. But one also has to think about the flip side of this. Many of these events could become potential tailwinds to growth next year. So, valuations, they have come down. Central banks might be easing next year. Sentiment is very depressed and that’s usually a good sign for subsequent 12-month returns. The war in Ukraine might end next week. It might end next year. China might also open up after Covid lockdowns. So, many of these negative factors this year could actually turn into positive factors next year.
And, finally, what’s the bottom line on the current state of global economics?
DR: I think there’s two things here. I mean this year and the last couple of years have been quite turbulent. And it seems like the world is all about geopolitics, and interest rates, and all these macroeconomic developments. But beneath the surface of that, there are still trends and themes ongoing. And there are companies out there that are part of the solution and not part of the problem. We try to find them and we try to own them for a long time. And I think that’s the way to make money, rather than trying to second guess where the war in Ukraine will end, or where energy prices will be in a quarter or two. Companies that are part of the solution will be good investments over the long run.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to David Rindegren of C Worldwide Asset Management.
Visit us at investmentexecutive.com where you can sign up for a.m. newsletter and never miss another Soundbite. Thanks for listening.
Go back to the article.