The end of the road for the monetarists?
The final trend is one that may not fully play out for many years but is probably the most important for long-term investors. Can regulatory authorities navigate a path back to growth and out of the increasing constraint of government debt?
Quantitative Easing (QE) does not make consumers spend, or businesses invest. In economic terms it increases the money supply but does not necessarily increase the velocity of circulation of that money in the economy. The pandemic has thrust QE once more into the limelight as the UK Government faced a forecast reduction in tax receipts of more than £40 billion in 20203, just as borrowing rose by £355 billion. The Debt Management Office is therefore selling billions of pounds of gilts every week to fund the £279 billion annual deficit. It is not an accident that the Bank of England has increased since March 2020 the amount of QE targeted by £250 billion to £895 billion; effectively the Bank of England is financing all of the Government’s significant gilt issuance.
This makes the UK increasingly vulnerable to any future rises in interest rates off the back of inflation, credit risk or even growth. The OBR references this in its latest report, stating that the 30 basis point increase in interest rates in recent weeks would already add some £6.3 billion to the interest bill by the middle of the decade. Therefore, investors need to keep aware of the risks of a steepening yield curve; in our UK Alpha Fund, we own names such as Charles Schwab and Lloyds1, who we believe provide us with protection on that scenario.
A diversified approach is key
In conclusion, the pandemic has left the world and, in particular, the UK in a very uncertain place. While the short-term picture has improved given the commendable success of the UK’s vaccine program, the Budget has only reinforced the medium and long-term challenges facing the country.
In constructing a portfolio, we can find many opportunities of companies that can still grow, have embraced technology and will exit the pandemic in a strong position. However, we find ourselves in a deep recession, with government balance sheets completely transformed and a step change in how we use technology. This time it is different, and we do not believe the world will revert to the previous status quo. The key for investors is therefore to have a diversified approach and own those companies that can navigate a world of geopolitical stress, economic uncertainty and structural change.
The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. Investment objectives and performance targets may not necessarily be achieved, losses may be made.
Simon is Co-Head of Quality at Ninety One. He is a portfolio manager with a focus on UK equities, and manager of the UK Alpha Fund and the Luxembourg domiciled GSF UK Alpha Fund. He is also responsible for the co-management of the specialist Quality investment team. Simon is based in the firm’s London office. Prior to joining the firm, Simon worked for Threadneedle where he was Head of UK Equities and responsible for the portfolio management of the Threadneedle UK Fund. He has been managing funds for over twenty years, having started his career with Schroders in 1998.Simon graduated from Durham University and the University of Aix-Marseille with a BA Honours degree in Economics with French. Simon holds the Institute of Investment Management and Research (IIMR) certificate.