After shutting down the global economy, we’re now living with the consequences. The pressures of reopening have fuelled a lot of the issues we’re currently facing – a shortage of fuel, lack of shipping containers, low number of car registrations – all of which are actually global supply problems. Working from home has also fundamentally shifted a lot of people’s thinking around their jobs. For instance, truck drivers have decided they don’t want to spend days and nights on the road, and now have become Amazon, Uber and Deliveroo drivers. All our lifestyles have changed dramatically over the last year, and several industries are suffering a lag effect as people slowly make their way back to work.
Actions always have unintended consequences and world leaders didn’t give a huge amount of thought to any of this last year. The priority was to ensure people’s safety and stop the virus in its tracks. A consequence of plenty of liquidity, a lack of supply has driven prices higher. A lot of industries shut down completely, which meant we stopped making things, too. Savings have increased as governments supported families, with little available to actually spend it on. It’s what equates to a real supply and demand issue.
Right now, supply is very low compared to demand – which is the crux of the problem. Most people have had at least 80% of their salary paid in the last year but they’ve not been able to spend it in the usual way. The cost of borrowing has also remained extremely low, so in many ways, people are pretty well off. It’s what creates sky-high demand across all sorts of industries – retail, hospitality, travel – so if the supply of those services or goods is low, it’s very easy for things to get out of balance. It’s also why prices have gone up – frankly, there’s enough people with enough money willing to pay that higher price.
It’s very possible inflation will be a short-term problem, though. As people go back to work and inventory levels return to normal, prices should, quite literally, sort themselves out. The supply and demand equation will be restored. It’s all about leaving market forces to correct themselves – they usually do. There may even come a point where supply starts to outstrip demand, and that means prices will ease off, too.
It isn’t necessary for the government to get involved. Markets can usually correct themselves once normal patterns of activity resume, and while there’s split opinion on this issue, it’s not necessarily the job of the government to intervene and ensure that correction happens sooner than it should. That said, a lot of what we’re dealing with now is partly the result of government decisions taken 18 months ago, so there is an argument to say it should step in – whether that’s getting more drivers on the road or more food on the shelves.
The current imbalance explains why house prices are still quite high. It’s an interesting situation here – interest rates are low, but the opportunity to borrow money at this kind of level isn’t likely to last that much longer. Rates will probably start to rise during the first quarter of 2022. Factor in strong demand for certain types of properties and cheap borrowing, and it’s no wonder house prices are soaring. It will probably reverse as things like higher interest rates and higher taxation come in.
It’s also feasible gas prices will stabilise. That said, it would be helpful if we didn’t have a massively cold winter this year. You’ve got to remember it doesn’t suit the Organization of the Petroleum Exporting Countries (OPEC) for commodity prices to go much higher than this – so the supply will inevitably increase. A lot of the reasons for the spike in gas prices appear to be temporary, too – a cold winter last year and some supply issues from Russia. They’re all likely to unwind, so the pressure should only be short-term.
The stock market is incredibly resilient. The FTSE is not far off its high from a year ago, the US-equivalent, S&P 500, is also up and global indexes – even bond markets – in general are still pretty strong. Investing in equities is still the way to go if you’re looking for maximum income i.e. to grow your money. The reason? The global drivers of the economy remain strong, and demand will still support moderate levels of growth over the next year or so. Nothing – even a rise in interest rates or inflation – will be dramatic enough to derail a recovery in the global economy.
When it comes to markets, I’m not overly bearish. During any period of economic growth or recovery, the stock market should remain well supported. Is now a good time to invest? There’s never a right time to invest – in theory, the ideal time is when markets are at a low, because that way you reap the most reward when they recover. But it’s not that perfect – in fact, it rarely is. And calling the ‘top’ or ‘bottom’ of any market is best left to psychics. Right now, at a global level, stocks look expensive, but so do most asset classes so returns are likely to be lower – but investing is ultimately the same as saving, so if you go into it with a long-term view, you’ll see your money grow over time.
Everyone who wants to start investing should read this book. We send it to all our clients. It basically explains that the longer you invest in stocks, the less risk you’re taking (because growth is more likely), whereas the longer you invest in the bond market, the more risk you’re taking (because you’re betting against inflation and your capital will likely be eroded over time).
You never want to be in the position of having to sell something at the bottom. If someone is forced to sell something for liquidity purposes i.e. because they need the money, but the market is weak, then that’s what costs people. Think ahead and specifically about what your income is relative to your capital needs. Also, inspect your savings and see how much liquidity is there. You never want to be forced to sell at the wrong point in the cycle, simply because you have no other choice.
There is a way to mitigate stock market risk right now. If you’re looking to put some money aside for the next five or ten years, then the stocks exposed to the recovery in global markets should see their share prices rise. Assuming they pay a dividend, you’ll basically be paid to own them. Just make sure you split your money across a wide range of quality companies – things like consumer stocks – which can react to and cope with things like rising inflation. It’s an age-old philosophy, but it’s the prudent way to invest.
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