The Winds of Change…
Since our last publication of View from the Square, the wider market outlook has changed dramatically. While a humanitarian tragedy continues to unfold in Ukraine, markets have proved to be somewhat resilient in the face of mounting macro-economic concerns. To put it candidly – traders have been insensitive to both the humanitarian and macro-economic issues unfolding. We disagree with this viewpoint on a one to two year view, despite the “music still playing” and markets recovering in recent weeks from their earlier selloff. For now, we continue to benefit from these trends, but we are positioned more conservatively than previously given the longer-term implications at play.
Just yesterday, the US government bond yield curve started to invert - a signal whereby the yields on shorter dated bonds begin to exceed those of longer dated maturities (in this case, the US 2-year government bond yield has risen above that of the 10-year yield). This has historically proved to be a fairly reliable indicator of an impending recessionary environment. While several of our peers and a chorus of economists are suggesting that “this time is different” (a phrase we generally approach with extreme caution) as the inversion is being driven largely by shorter term expectations rather than a much longer-term decline in growth and/or inflation assumptions, the outlook is far from as healthy as it once was.
Consumers are being hit by a number of key inflation factors, ranging from energy prices to commonly purchased goods in their supermarket baskets. The fundamental driver of this is not just a rise in energy prices, but also weakened global supply chains. The latter is a combination of the Covid pandemic and the ongoing deglobalisation trend we are witnessing from the Russian war on Ukraine, in addition to geopolitics surrounding technology nationalism and the redrawing of supply chains. The recent announcement of Intel’s $88bn European expansion is just one such example of this, as large companies begin to “wise up” to these trends and look to protect their access to key markets – we suspect that others will be less prepared and caught out by this trend over the coming period, which would likely continue to erode consumer confidence.
Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.