Insights

Monthly Outlook - February 2023

More often than not, when a central bank moves to loosen or tighten monetary policy, given that economics is an inexact science, they will typically end up over-tightening or over-loosening and making policy errors. It has been our belief for some time that the Federal Reserve would overtighten during the current cycle, leading to a sharp recession in the US and more significant collateral damage than was probably necessary to get inflation under control. Now we are less sure of a recession being a certainty, not because we think Chairman Powell and his team at the Federal Reserve have judged their tightening exercise to perfection, but more likely because they might have just got lucky.

Monthly Outlook - January 2023

As we enter 2023, there is probably no more significant determinant on markets and the economic path ahead than that of U.S. inflation and the Federal Reserve’s response to it with a view to bringing inflation back down to its longer-term target of 2%. We have a rather unusual situation where economic data is deteriorating, with U.S. manufacturing on the precipice of a recession, and yet we still have a seemingly very hawkish Federal Reserve. At this point in the business cycle, historically, the Federal Reserve would typically be about to start cutting interest rates if it had not already begun.

Monthly Outlook - December 2022

Just like winter storms, not all recessions are similar. Depending on their particular characteristics, the impact and after effects of these storms can be very different. Our regular readers will know that, since early summer, we have been predicting a significant growth slowdown and a recession to hit the US and other major global trading blocs, such as Europe and the UK, in late 2022 and the first half of 2023.

Monthly Outlook - November 2022

Most of us enjoy a nicely paced movie with a fresh storyline and a few twists and turns to keep us guessing. Observing the Federal Reserve combat inflation with its aggressive interest rate hikes and the resulting economic slowdown emerging over the last several months has been comparable to watching a below-average movie with a relatively predictable plotline and a sloth's pace.

Monthly Outlook - October 2022

Since April of this year, we have been convinced that the global economy has entered a synchronised slowdown and that this will ultimately take the sting out of inflation and pressure off higher prices. Subsequent economic data has only reinforced this view, and it should therefore come as no surprise that we stick by our view and are now even more convinced that our view will prove correct.

Monthly Outlook - September 2022

As an active manager, our overriding goal is to beat the market return. Indeed, the holy grail is to beat the market return but with less price volatility than the market. For some months, we have adopted a non-consensus view. We believe the U.S. and global economy will weaken quickly, vanquishing the Federal Reserve's latitude to hike interest rates aggressively. In our opinion, it is only a matter of a few months before significant economic weakness forces the Federal Reserve to go on hold indefinitely.

Monthly Outlook - August 2022

As investors, we know uncertainty creates price volatility. When we have more than one possible investment outcome, we get greater price volatility as the market tries to price in the probability of these various outcomes and the implications for markets. One way of dealing with this uncertainty is to adjust your investment timeframe. Generally, if we consider complex questions over a longer timeframe, we can narrow the number of probable outcomes and sometimes almost eliminate the uncertainty.

Monthly Outlook - July 2022

Some of the hardest decisions in life are those defined by dilemmic choices. The U.S. Federal Reserve Bank, joined by a plethora of other central banks across the globe, are now deciding whether they should risk crashing their economies through tighter monetary policy, or allow inflation to possibly reek even greater economic havoc over time if left unchecked. This choice has been primarily forced on central banks by the inexorable rise of demand pull inflation and exacerbated by supply-push inflation, the origins of which both are found in the global pandemic.

Monthly Outlook - June 2022

It can be argued that markets are always in a state of anticipation, at any point pricing how the distilled wisdom of the investment masses see the future development of economic growth or inflation and their associated impact on corporate earnings. We are now at one of those critical junctures - will the inevitable monetary tightening needed by the Federal Reserve Bank to tame inflation force the U.S. economy into recession and, if so, how will the market price that risk?