Interactive investor, the UK’s second largest private investor platform, hosted an event for its customers which explored why investors should not underestimate political risks.
The event, which ii customers could register to watch live, featured several experienced investment experts and outlined the geopolitical landscape for investors, and how retail investors should be thinking about these issues when looking at their own portfolios.
These events are designed to guide investors through themes and topics that might impact how they are looking at their investment and give them more of the tools and knowledge to become better investors.
We are living in a highly unpredictable and volatile world. As the panellists discussed, headwinds investors need to navigate include the devastating invasion of Ukraine, higher interest rates, and continued tension between the US and China – particularly in terms of trade. One of the key focuses of the panel’s concerns was recession risk.
The event was chaired by Moira O’Neill, Head of Personal Finance at interactive investor.
Joining ii’s distinguished panel was a range of investment experts. Namely: Michael Grady, Head of Investment Strategy at Aviva Investors, Trevor Greetham, Head of Multi-Asset at Royal London Asset Management, and Gareth Witcomb, manager of JPMorgan Multi-Asset Growth & Income pl’.
Giving the broader market backdrop, the panel was joined by ii’s very own Head of Investment, Victoria Scholar.
The recent sea change in markets: despite volatility, are there still opportunities for investors?
Setting the scene, Victoria Scholar, explained: “Markets were seemingly unstoppable for a number of years, underpinned by cheap money and rock-bottom interest rates. However, post-pandemic we have seen a real sea-change in the markets; we’ve seen the spectre of inflation, a spectre that needs to be tempered. We’ve therefore moved from monetary accommodation to monetary tightening, in turn – spooking markets. As we’ve seen, technology stocks, in particular, have really bore the brunt of selling so far this year.”
Scholar added: “That said, there have been pockets of outperformance in certain sectors -commodities being one of them, and we have also seen the FTSE 100, for example, hold up fairly resiliently. This is thanks to its favourable sectoral mix – leaning towards the banks and some of those big oil stocks like BP and Shell. So, despite the volatility, there are still potential opportunities.”
The impact of the war in Ukraine
Scholar stated: “The devastating war in Ukraine has created a lot of supply uncertainty – we’ve seen oil prices move to triple digits; we are also seeing soft commodities sharply higher… I don’t think the markets perhaps realised just how dependent we were on Russia and Ukraine for certain commodities, and that’s really been showcased by some of these dramatic price rises.”
A bumpy ride to recession, with lots of blame flying round
Trevor Greetham, Head of Multi-Asset, Royal London Asset Management, believes recessionary risk is something investors should be acutely aware of.
He told the panel: “The most obvious risk is recession risk. This follows on from the inflationary environment we currently find ourselves in. Inflation is very high, and it’s persistently high. The invasion of Ukraine was unexpected and pushed commodity prices up – they’re up 40% this year – and the hard lockdowns in Beijing and Shanghai have also negatively impacted supply chains. Central banks couldn’t have forecast these events, but that’s where we are.
“To get inflation back out of the system, they need to raise interest rates until the economies create the spare capacity that is needed. That means creating recessions.
“One thing we should be very aware of in this country is that we have not had a recession that you can really pin on a central bank in the UK since the Bank of England got its independence in 1997, and politicians are already pointing the finger because they don’t want to take the blame. Questions will be raised about the need for such strict inflation targets.
“Inflation is hitting us all the time, and as an investor you need to have hedges in the portfolio, like commodities, commercial property and UK equities, which are proving resilient in these conditions.”
Michael Grady, Head of Investment Strategy at Aviva Investors, agreed: “The last monetary policy report from the Bank of England was quite extraordinary, and was, as far as I am aware, the first time that the Bank has got pretty close to forecasting a recession. It wasn’t quite there – but essentially, no growth next year, and a projection that sees inflation falling all the way back down to below the 2% target in 2-3 years’ time. Ultimately, this, in a time of rising interest rates is very, very unusual.”
Gareth Witcomb, Portfolio Manager in the Multi-Asset Solutions Team at J.P. Morgan Asset Management urged investors to remember that this is not isolated to the UK.
Witcomb said: “Inflation is a global headwind. We’re seeing rates creep up even in areas of the world where it has been traditionally difficult to generate inflation, like Europe and Japan.”
Structural headwinds to inflation are turning into tailwinds, claims Michael Grady, Head of Investment Strategy, Aviva Investors, who said: “Whether you think this trend started with Trump’s trade war and tariffs on China, Brexit, and, of course, the response from the international community to what is happening in Ukraine – these are all things that start to push structural headwinds in the other direction and lead to unintended consequences.”
The energy security debate, sparked by the Russia/Ukraine situation, is also a key risk for investors, points out Michael Grady at Aviva Investors: “We have had the sanctions package from the EU announced towards Russian oil, but Russian gas remains available, and I think it’s unlikely it’ll be sanctioned as they’re simply too dependent and will be for too long.”
However – Europe is becoming more united, says Royal London’s Trevor Greetham
Greetham explained why investors should be more optimistic about the Eurozone, despite fears of a global recession and rising Italian and Greek sovereign bond spreads over Germany.
He said: “The war against Covid, the war against climate change and a new cold war with Russia are uniting Europe in a way which makes me more confident that the Eurozone will survive.
“There is a lot more centralised spending and burden sharing going on because of these common enemies. In the past when we’ve seen the risk of a recession investors start to wonder which country is going to break away first, but I believe this federalisation means the Eurozone will hold together.”