Investors’ fixation on inflation and interest rates is masking the true extent of the geopolitical risks facing stockmarkets, according to Premier Miton Global Investors’ Anthony Rayner (pictured).
Rayner, who is a multi-asset manager in the Premier Miton Macro Thematic Multi Asset team, said “front-of-mind” market risks tend to take precedence over others as they are “easier to understand and more talked about”, while overlooked headwinds are “more complex and potentially slower moving”.
In a Perspectives investment note published this week, he said: “For the last few years, markets have been fixating on rates and inflation, to the extent that most other risks are obscured.
“Inflation risk is fully embraced by the market, whether you fall into the lower for longer, or higher for longer camp. It’s a fairly simple economic concept to grasp and one that we all see in our daily lives.
“From an investor perspective, there are frequent data points to focus the mind: consumer prices, core prices, producer prices, services, inflation expectations, central bank comments, central bank rate decisions, etcetera. Lots of data which makes lots of noise and keeps it front of mind, overshadowing many other risks.”
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In contrast, Rayner said geopolitical risk is harder to quantify and is more multi-faceted, although he pointed out the direction in which global power dynamics are shifting is “very clear”.
“The Greek historian Thucydides wrote: ‘It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable’. The so called ‘Thucydides trap’ suggests that the decline of a dominant power and the rise of a competing power make war very likely.
“Turning to today, it’s not to say that war is inevitable between the US and China, but we should expect tensions to escalate and also not to be limited to China and the US, as respective allies get drawn in.”
With war fatalities globally now at a 50-year high, and with no signs of geopolitical unrest waning, Rayner said it is important to take conflict into account when considering inflation, given countries often print money to fund war efforts.
“We don’t think it’s a coincidence that the low inflationary period from 1990 to 2020 was a period of relative global peace,” the manager reasoned. “However, as tensions build between the two superpowers, with their economic and military power converging, the dynamics are changing.
“More recently, two major pieces of US fiscal policy have been the so-called Inflation Reduction Act and the Chips act, which are both attempts to ring-fence two strategic industries from China. These two acts account for around $400bn of tax credits, loans and grants, which is of course inflationary.
“More directly, there is also pressure to increase defence spending, which conflicts with already historically high government debt levels.”
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Rayner also believes it is no coincidence that globalisation has increased dramatically over the last 30 years to the end of 2020 – during a time of relative geopolitical peace. As globalisation contracts, he warned that this will add to inflationary risk – a prime example being the volume of trade passing through the Suez Canal freefalling due to the Israeli-Palestine conflict.
The multi-asset manager concluded: “Ironically, markets are focusing their attention on inflation prints and less so on some of the longer term forces feeding inflation, such as increasing conflict and deglobalisation.
“We retain our view that inflation will be higher for longer and therefore uncomfortable for central banks. We have a material exposure to risk assets, including inflation beneficiaries, such as gold, oil, agricultural commodities and property. We also retain a short duration exposure in bonds, to limit interest rates risk.”
This article was written for our sister title Portfolio Adviser
