Unknown pleasures: A new era for equity investors #2
World in Motion – Global equities blog

Unknown pleasures: A new era for equity investors #2

The new economy

It’s a new era for equity investing. A tumultuous couple of decades were marked by consistently low inflation, low interest rates and low earnings growth. That has all changed. Over the next two posts we’ll explore what this means for the shape of the economy over the next decade, and for portfolios.

Inflation

While the 10% inflation of the post-pandemic world was likely transitory, it will likely stay higher than it was post-global financial crisis (GFC). China has run out of workers, and geopolitical tensions coupled with the pandemic experience of long supply chains make labour arbitrage less appealing. On/nearshoring is the new path, and labour costs will be higher. The transition to low carbon energy sources has also begun. While many of these have near zero marginal cost, the upfront capital cost is large and potentially inflationary. Technology and the promise of artificial intelligence will drive productivity, but will it offset the falling number of workers?

Economic Growth

GDP=C+I+G+(X-M) is a formula representing aggregate demand. Ignore X-M (net exports); as for the world, it must sum to zero, though it is likely that trade will not outpace the world economy as it did up to the GFC. The consumer balance sheet is healthy and the cost of servicing debt manageable. Worker shortages mean wage growth should remain healthy, and consumption should develop at least in line with wages.

Investment prospects for the coming decade appear strong. When thinking about global problems, the solution seems to be capital expenditure: geopolitics/nearshoring – capex; decarbonisation – capex; worker shortages – capex; crumbling infrastructure – capex; shortage of housing – capex; war – capex (sadly). Investment should be a significant contributor to GDP growth. Who pays for all this may be an issue.

Government

If there is an imbalance in the system it is here. The GFC followed by the pandemic has seen a massive jump in government debt (while the private sector/households delivered). Since 2008 the US has gone from 45% debt/GDP to 110%. The UK is not far behind, and Italian debt is 140% of GDP1. Japan at 224% is another level entirely and servicing that debt even at ultra-low interest rates is the main element of government expenditure. The UK spends more on interest costs than it does on education, and as debt matures and is replaced with higher cost debt the bill is only going one way (Figure 1).  
Figure 1: What percentage of revenue does the UK spend on debt interest payments?
Figure 1: What percentage of revenue does the UK spend on debt interest payments?

Source: PNS and LGB, as at 12 June 2023

As such, rising interest rates are likely to lead to a crisis in government bonds. There was austerity post-GFC, and judging from all the problems in health, education, social care etc the solution this time around is unlikely to be massive spending cuts. The answer must be increased taxation. But politicians need to face a crisis to change direction. Maybe Liz Truss’s 50 days in office are a precursor the world should worry about. Against that backdrop equities look pretty good. 

 

Despite recession fears, the economic outlook for the next decade should be better than the past 13 years – possibly in real terms, and definitely in nominal terms as inflation will be higher. For equity investors that is an important change.

Equities versus bonds

Equities should trade richer to bonds than they have post-GFC. Higher nominal GDP growth implies higher sales growth for companies – and hopefully cash flows and profitability. After 13 years of no profit growth, the coming decade offers better prospects.

 

The average company will grow earnings, though not without headwinds – wage growth, rising interest costs, and governments potentially raising taxes. Combine this with crisis risks in government bonds and equities appear ever more appealing – although as equity investors we are biased!

 

Much of the shift in equity valuations relative to bonds has already occurred (Figure 2). Yes, equities look expensive relative to the post-GFC experience, but they are appropriately valued given the higher nominal GDP growth prospects.

Figure 2: ACWI versus Global BBB yield-to-worst
Figure 2: ACWI versus Global BBB yield-to-worst

Source: Bloomberg, as at November 2023

So we can expect a different environment in which to invest. And one we think will be conducive to equities. How will we approach this? We’ll cover that in the next post …

28 February 2024
Neil Robson
Neil Robson
Head of Global Equities
Share article
Share on twitter
Share on linkedin
Share on email
Apple web badge
Spotify web badge
Listen on Stitcher badge
February 2024
Share article
Share on twitter
Share on linkedin
Share on email

1 Bloomberg, as at November 2023

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com        

 

 

Related Blog Posts

22 March 2024

Japan: we’re more convinced than ever

Investors are increasingly turning their attention to Japan. We spent two weeks there and met dozens of companies. But which businesses look best placed?
29 February 2024

Unknown pleasures: A new era for equity investors #3

Portfolio positioning
27 February 2024

Unknown pleasures: A new era for equity investors #1

How we got where we are.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Investment Strategies

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Woman listens to music through headphones
Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium