‘Polarisation’ is arguably the biggest global challenge today, seeming to encapsulate the zeitgeist of the 21st Century says Stephanie Butcher, Chief Investment Officer, Invesco in her 2022 Outlook. It affects global and national politics, attitudes to the climate challenge and social issues.
Yet one sees evidence all the time that when issues are debated at a more granular level, or one seeks to understand why individuals hold a certain viewpoint that the reality is so often much more nuanced. It is increasingly important in the time of Tweet investment cases and partisan news headlines for us to always ask the balanced questions on behalf of our clients; to engage and get beyond knee-jerk assumptions. We mustn’t be afraid to admit that at times the definite answer on a specific debate is not yet clear.
The polarised debate in the sphere of ESG assigns entire sectors into the ‘good’ or ‘bad’ camp. In terms of carbon emissions produced both historically and today, the quantitative analysis is easy to do. However, the achievement of widespread electrification, decarbonisation and to establish green infrastructure requires a significant capex cycle; some of the biggest enablers of that transition may be the same companies that in the legacy world were significant emitters. We need to take a holistic approach to assess the net effect of capital allocation decisions by individual companies. A polarised view risks missing the ability to facilitate and accelerate change.
The pandemic has shifted the under-pinning of post GFC policy-making, initially driven by a desire to protect incomes during lockdown. The political impetus to close the inequality gap, and the urgency of the green transition agenda have become the wrappers for fiscal spending on top of aggressive monetary policy. Pandemic supply chain breakdowns and polarising geopolitics have combined to accelerate a reappraisal of the trend of globalisation. And the long-term effect on wage rates of changed attitudes to working patterns potentially reducing supply are an additional unknown.
Whilst some long-term deflationary factors stay in play, most notably the effect of digitalisation, the slowing or even reversal of trends in labour costs, fiscal spending and globalisation have brought the debate on inflation into sharp focus. Data exists currently to back the strongly held views of both ‘Team Permanent’ and ‘Team Transitory’ – but the very fact there is a debate to be had demonstrates something has changed. In financial markets where the absence of inflation was the constant for over a decade the ramifications of some inflation in the system for asset allocation are potentially significant.
One of the over-arching tenets of our investment philosophy is ‘take risk when you are paid to do so’. We recognise that we underestimated the impact of post GFC extreme monetary policy and the attendant re-pricing of long duration across asset classes. We have accordingly undergone a prolonged period of reflection, debate and challenge to recalibrate how we think about valuation in that context. Nevertheless, we stay true to our underlying philosophy that the price one pays for an asset is the key determinant of long-term returns.