Geopolitical Disruption

Disruption in business is well understood. The incumbent, a large profitable giant corporation which has built a monopoly over decades becomes complacent, forgets how they got to the top and focuses on maximising profits and protecting its turf at the expense of innovation and real growth. The disruptors change everything. They move fast and break things. They have no respect for the status quo and no regard for ‘how things have always been done’ and certainly no respect or fear of the incumbent. They are hungrier and prepared to do whatever is necessary to prevail. That’s why they win. Relentless pursuit of their objective against a comfortable and disorganised incumbent.

This is also the way disruption of the world order works in geopolitics. It doesn’t happen as often on the geopolitical level, but it is certainly happening now. It’s the way empires rise and fall, and it’s been like this for centuries. The USA, European nations, and much of the West are the country equivalents of giant corporations. Fat, lazy and content. Rightly or wrongly China and Russia are disruptors prepared to use methods, force, and tactics that the comfortable nations are not accustomed to anymore.

There is perhaps no better example of this than the juxtaposition of UK and US politics (in disarray and leaders losing power) vs China and Russia (leaders consolidating power). This is significant as we approach conflict situations of the disorganised vs organised. Unfocused vs focused. Those that can’t act decisively and those that can.

Unless the West adopts a more competitive and strategic mentality and realises it’s in a fight for not only relevance but survival, they risk the same fate as the corporate giants who did not prepare for disruption. It’s critical that Western nations adapt to the changing geopolitical landscape to mitigate their vulnerabilities to the emerging threats from these disruptive nations.

There are some unique parameters with respect to the battle ground for any conflicts that loom ahead. Supply chains and energy supply in a globalised world economy have become weaponised. Other key areas of concern include state sponsored cyber-attacks and even social media. We are all familiar with the power of platforms like Facebook and Twitter to influence people. However more importantly will be Tik Tok. Ownership of the world’s most popular social media app among young people is with China.

People tend to focus on privacy and data issues in relation to Tik Tok and while that is a genuine concern, I would be more concerned with young people getting entertainment and information via what amounts to a modern day trojan horse. At some point Western governments will move to warn people against using the app but if we move into a deeper conflict, it will be banned and cut off. 

Russia’s threats to escalate and use nuclear weapons should not be taken lightly. They have on their side a dangerous precedent of such weapons being used pre-emptively against an adversary when the US bombed Japan in 1945. While a win for Ukraine would be great and just for freedom, the reality is that it would raise the spectre of a massive escalation and retaliation from Russia if they have nothing to lose. A drawn-out war that weakens Russia over years may be a better result for world peace. Regime change is often touted but that is fraught with danger. The last thing the world needs is a younger more aggressive and ambitious version of Putin.

Strides are being made when it comes to restructuring trade and supply chains. These will need to be modernised for the new circumstances emerging in the world. Reshoring manufacturing and services and securing energy supplies need to happen as quickly as possible. This is a huge investment opportunity but also an essential strategic requirement for the West to become as independent as possible in the years ahead of any potential conflict. The sooner the better for nations and businesses.

The reality is that this is an opportunity for the West to reinvent itself. As in business, competition often awakens the slumbering giant to action. The rise of these disruptive nations may well prove to be the catalyst that is needed to refocus the West on what made their nations so great and bring forth a new age of innovation and productivity that is both sustainable and prosperous.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Living on Borrowed Dime

With the price of almost everything rising across the globe over the last 12 months you’d expect consumer spending to slow abruptly at some point. Surprisingly, this hasn’t really happened yet. It’s strange because clearly, the price of key expenses has increased dramatically, from rents and mortgages through to fuel, power, and food. While at the same time, incomes haven’t increased at the same pace. So how is it that spending is being maintained? How is it sustainable?

The answer is simple. It’s not. What we are seeing is a lag effect and consumers failing to adjust their spending to their new reality. You can see it at both the macro and micro level. Consumers are not as resilient as they appear. While they are spending as they have become accustomed to; they are now living beyond their means. To maintain their lifestyle, they are drawing down on their savings and drawing up on their credit cards and mortgages.

They all know they are going backwards and can’t keep it up, so at what point do their spending habits change? After two years of covid restrictions, this year has been about rewards and spending money on holidays and dining out because everyone feels like they deserve some fun. But as financial reality bites and the new year looms I’d expect Christmas to be the last hurrah for the consumer to spend up big. My guess is these changes come in two phases.

Phase one is after the Christmas and New Year break. It may seem simplistic, but consumers and their spending patterns are not a sophisticated collective, they are everyday people trying their best to navigate the pressures of work and raising their family. Sometimes you don’t need to be an expert in finance to see the signs ahead for the economy. Often the drivers come down to basic human emotions, fear, greed, pleasure, and pain. I think this will be how it plays out at the consumer level.

Families are aware of higher costs, they are starting to feel the pinch but not adjusting yet, but the pressure is building. Over Christmas, they will be catching up with family and friends. Topics for discussion will be increased cost of living, fuel prices, food prices, power bills and mortgage interest rates. People previously trying to maintain their lifestyle to ‘keep up with the Joneses’ while slowly sinking will take comfort as they discover that everyone they know is in the same boat. 

Psychologically, being the first to be frugal when things are getting tight makes it look like you aren’t able to keep up with everyone else. But over Christmas, people in their social groups will become comfortable that they are not the only ones, that in fact it’s everyone. People will become more comfortable about cutting back collectively. It’s easier to tighten your belt when everyone else is too.

Just after these family gatherings and social catchup over Christmas comes the one day of the year when people really think about their lives and goals, that’s January 1. New year’s resolutions and a commitment to balance the family budget or at least live within their means will become a key focus. Those that don’t adjust will sink, but either way consumer spending slows.

What does that all mean in practical terms? Consumers spending less directly hits businesses. Sales will fall across the board, though at different rates for different industries of course. Some businesses are better insulated against a slowdown in consumer spending than others. Some businesses are not reliant on households, while other businesses have pricing power.

But you’ve got to keep in mind that the profit equation for businesses has two sides, revenue from consumers buying their goods and services is one part. The other reality is that businesses are getting hit hard with inflation and rising costs too. Power, fuel, and higher interest rates are all hitting the bottom line hard. So, in 2023 businesses will be hit with falling sales as consumers start to dial back spending and higher costs, a double whammy for profit. This leads to phase two of the fall in consumer spending.

Businesses will have no option but to cut costs, ultimately leading to job losses and it will flow on through to a higher unemployment rate which will be a game changer for the economy and the consumer. Rising unemployment will have a dramatic impact on consumer spending not only as people lose jobs and have less money to spend but because it will shake the confidence of consumers even further. They will fear that they may be next to lose their job. That fear around job security will have a very damaging impact on the economy and further consequences for businesses, government and property that will play out over the course of 2023.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

10,000 Steps and 50 Words

Successful investing is not rocket science or about being some mathematical savant as it is often portrayed. It’s far simpler than that. It is really about habits and discipline. But I would go a step further and say that not only is successful investing predicated on good habits and discipline, but success in any field or pursuit in life.

It probably took me until I turned 40 to really understand and appreciate the power of cultivating good habits. When I was younger, I could achieve a level of success through hard work, sheer willpower, and determination. But as I got older, I started to realise that if you aren’t disciplined on the small-ticket items then it flows through to the big-ticket items. Natural ability will only take you so far too and this is as true for sport and business as it is for any aspect of life.

Habits and routines are a really important part of developing a disciplined mindset. Two of the best habits I’ve introduced are walking and writing. I’ve been genuinely surprised by the impact and flow-on effects that introducing these simple tasks into my daily routine have had on my overall performance.

I’ve had a Fitbit for years, but in November 2019 I set myself the target of getting 10,000 steps a day, every day, no excuses, no missed days, no exceptions. I ended up getting to 800 days in a row before I got covid at the start of this year and ended up in bed for a week. I had built a new streak to 250 days in a row before I tore my calf playing basketball 3 weeks ago.

But it does interesting things to your motivation. When you have a streak like this and wake up especially tired or run down you have a decision. Is it worth breaking the streak for that one day of laziness? So far, unless I am physically unable to walk, on every occasion the time invested in accumulating my streak has pushed me on those days to get the steps. It’s helped me lose weight and improve my overall fitness.

When I started writing my weekly insights note to clients in early 2021, I wanted to be sure that I didn’t just start writing it and stop after 4 weeks. My main focus was to make sure I was consistent, so I transferred the lessons from my minimum steps to writing. I set myself 1 article a week and to do that I had to write at least 50 words every day. Most days I write more than that and the finished articles are between 400-800 words. But on those days, I really don’t feel like writing, or I am pushed for time I can dial it down to 50 words and I have maintained the consistency required to build the habit.

What I didn’t expect was how beneficial writing was for me as a tool to help me with my investment process. Writing a note to send out for other people to read makes you challenge the concepts and preconceived ideas you have on a topic. This is particularly useful from an investment perspective. It makes you question your assumptions and your biases. Often when I write I imagine the counterpoint to a view. It’s a great process in identifying if there are any flaws in your rationale. In fact, on more than one occasion I have changed my mind on a topic or view that I held as I held imaginary debates with the people who may query it.

These disciplines are foundational and lend themselves to building additional layers of habits and activities over time. For example, after a while of completing 10,000 steps, I added weight and strength training and then consulted with a dietician to introduce improved eating habits. These days I weigh most of my food. Having consistently produced an article each week I turned my attention to a podcast. Initially monthly, then 2 a month. It’s been just over a year now and we’ve published 22 podcasts so far with a range of great guests. So not only does it matter that you are disciplined on the small things but getting those foundational habits right leads to success in bigger things.

A Bit of Economic Pain Won’t Hurt

I look at young people today and find it interesting to watch them come to grips with what is likely to be their first real taste of the pain that comes with higher inflation and lower standards of living. Many young adults (and not so young) have become so accustomed to an easy life today that there is an air of expectation of a minimum standard that they are entitled to. It’s a little detached from reality and I don’t think a hard wakeup call would hurt. It all depends on what you get used to, but 2023 is going to be a shock for many. But the reality is it is all about perspective.

Growing up in Geraldton, WA my dad always told me I had to work, he’d never give me a cent, but that I’d always have a roof over my head if I needed it. The irony of that was not lost on me when at 18 he told me I was too hard to live with and needed to leave. To be fair I was pretty hard to live with. Fortunately, I had somewhere to go, Dad had a 1-acre industrial block with a couple of sheds on them he rented out to local transport business. At the back of the yard was a 3m x 3m tin shed, about the size of a bedroom. It had a toilet and a sink and dad put down some carpet to make it feel real homey for me. We used Selleys gap filler all around the shed to keep out the spider and snakes. I threw a mattress on the ground and bought an electric fry pan. He charged me $30 a week rent which was probably above market value for a tin shed in a Geraldton industrial complex in 1994. But to be honest I loved living there.

At 18 I’d also started going out with my future wife, Paula who I would marry 2 years later in 1996. We planned to go to Kalbarri for a honeymoon for 3 nights but didn’t because we had less than $10 in our bank account when the time came. We had bought a block of land for $25,000 with the $3,000 cash I had in my top draw from working as a brickie’s labourer in my school holidays. The local Town and Country Building Society Manager was kind enough to defer settlement on the block until Paula turned 18 and was able to sign the forms herself. Then we started building the house, it was a 4x2 and cost $59,000. Paula made about $14,000 a year and I made about the same in our first jobs. It was a big commitment and things were tight, there were a lot of things we chose not to have and couldn’t afford.

Once the house was ‘finished’ we moved in. We had no bed, we slept on a mattress on the ground for our first 2 years. We had no carpet, only concrete. We had no blinds or curtains, only black plastic taped up to the windows. The front yard and back yard were empty. We spent the next several years working hard to save up and one by one we got each of the items ticked off to slowly complete our home. If I tell my kids or their friends that they can’t understand why we did it. I think everyone has become so accustomed to getting everything they need immediately they have not only forgotten how to go without or save for something over time they don’t even entertain the idea as part of the options to consider.

But all of this is just to point out how easy we all have it today. How my wife and I did things when we were married young was no different from many who did the same a generation earlier than us. Back even further, my grandparents came out from Italy before the war and certainly everything they did simply to raise their family was many times harder than anything we went through. It is all about perspective. I don’t think an economic downturn is the worst thing in the world. Many may think that it is and as inflation continues to run above wages growth and the cost-of-living soars many will need to make adjustment to their spending just to make ends meet. But adjustments can always be made and a new perspective and appreciation of frugality for the younger generation coming through may be just what they need to prosper in the years ahead. It doesn’t hurt if you don’t start off with everything. In fact, I would say there are great lessons in having nothing to start with at all.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Feels Like Something Is Going to Break

We are at the point in the downturn where nothing catastrophic has happened yet but there is mounting evidence of dislocations and bubbles forming everywhere. From bond markets to currencies there are crises unfolding around the world and it won’t take much for something, somewhere to break. Right now, global financial markets have a 2007 early phase of the GFC feel, where everything is heading the wrong way, and no one can really stop it. It just needs to run the course.

I wrote earlier this year (15th June 2022) when the US share market (S&P500) was down 21% from its peak, that I expect that figure to end up being in the range of 25-40% down from its peak. In the meantime, we’ve seen markets go up and come back down. But nothing has changed, and I still believe that will be the case. The S&P500 is now down about 23% from its highs but there is a long way to go. The impact of all the negative influences have not yet come home to roost, that’s still ahead. 

Interest rates across the world will go higher still. Corporate earnings are going to fall in the quarters ahead. A European economy in chaos will take its toll on the global economy. Large multinationals with earnings from Europe and China are especially susceptible. Further still, with so much uncertainty in the world, we are seeing the flight of capital to the ultimate safe haven in the US dollar and that is wreaking havoc across the world as it impacts currencies and interest rates for all nations. 

Perhaps the most stunning moves this year has been the dramatic rise in global bond yields and the subsequent collapse in bond values. This has already been a once in a lifetime event, but the consequences are yet to truly filter through and be felt. With countries worldwide needing to fund budget deficits, at higher interest rates, the competition for capital is going to become a problem. It means countries with weaker economies and currencies will need to pay more. Some won’t get funding…then what happens to their budget? That has flow on effects for all markets too.

Yet we haven’t seen investors panic and markets capitulate. Until we get that I don’t think we are near the bottom. That’s the part for markets where there is no floor, no stable ground and everyone starts to panic. I expect that is ahead of us in the coming months where any of the following are possibilities: 

• The spiralling of the energy crisis leading to a severe recession in Europe

• The fragmentation of the EU under the strain of geopolitical and economic turmoil

• Russia escalating the war with Ukraine

• China and Taiwan tensions leading to conflict with the US

• Currency crisis unfolding – from the pound to the euro and the yen

• Bond yields and interest rates soaring

• Social unrest globally as countries struggle to survive

Where to invest in times like this? It’s the same answer I’ve given since the start of the year and late last year. Be overweight in cash. I know it is unpopular especially with inflation high too but as interest rates started rising in the first 6 months of the year and every other asset value fell, cash was the best way to protect your capital. I think rates keep going higher in the short-term creating a similar environment to the Jan-Jun period of this year for share markets where they fell substantially.

What am I avoiding? High growth stocks that don’t make a profit, as well as most property, and fixed rate bonds. Though as interest rates start to peak, the bond area is going to become a lot more attractive. I am also avoiding unlisted private equity and venture capital investments that many investors have fallen in love with. While unlisted investments may not appear volatile because they are not listed on the stock exchange this doesn’t mean the underlying assets won’t fall in value.

Frankly, I am surprised it has taken so long to get to this point. It is the reason I have been talking about being overweight cash since late last year. But the reality is these things simply take a lot longer to flow through the system than you’d think. When I look ahead and think about how things will play out it feels like it should take 6 months but inevitably it takes 18 months. That puts us at the halfway mark.

In my opinion, at this point, you should have the maximum amount of cash you would ever have in your portfolio. I am not necessarily saying increase cash now, I am saying you should have been prepared already. Cash is still king as it has been for all of 2022. Outside of that the most important investment strategy for the next few months is going to be patience, keeping it simple and a focus on high quality investments that you are confident holding for the long term regardless of volatility.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Looking Beyond the Current Turmoil

With the constant barrage of economic and geopolitical worries, it’s easy to become caught up in the short term. Certainly, the next few years are going to be difficult for investors to navigate. But I am mindful that however treacherous conditions become, the storm eventually ends. So, it is critical to keep focused on the long term and ensure that you are positioned and ready for when it does.

The major problems and risks the world faces now are well known.

• Inflation

• A dysfunctional USA

• Russian invasion of Ukraine

• Potential for Chinese invasion of Taiwan

Beyond these we’ve also got the second and third order effects as issues come to a head.

• Energy crisis

• The risk the EU fragments

• The end of globalization and supply chain disruption

• Potential for dislocation in financial markets

Any of these seemingly once in a generation problems are difficult enough to deal with but as they all converge, the global situation is particularly fraught. Throw in a black swan event here or there and it’s anyone guess how things unfold in the short term. But what about the long term? Call it 5 or 10 years. What does it look like as the world grapples with these issues and moves forward?

Firstly, and perhaps most importantly the world in 10 years will have solved the energy issue in terms of continuity of supply. Most nations will have put in place plans to ensure their national security by learning the lessons from the energy crisis unfolding in Europe. No nation will want to have their national security compromised because of vulnerabilities in their energy supply.

The biggest mistake Germany and Europe made was becoming dependent on Russia for their energy supply. It is at the heart of much of turmoil Europe and the world now face. It is an historic strategic blunder that will serve as a warning for decades to come. Yet it may serve a purpose that enables the west to pre-emptively manage a far greater threat, the world’s supply chain reliance on China.

That brings us to the end of globalisation. Beyond securing energy supply countries and their businesses are now thinking much more strategically in terms of their supply chains. Dependency on other countries is a risk and one all nations are now moving to mitigate. This means reshoring supply and aligning with allies. It means that the cheapest provider is not the best, rather it’s the cheapest provider within the context of supply chain continuity and national security.

In other words, the way the western world is rapidly removing its dependency on Russia is happening with other nations who are seen as threats. This means China. Over the next 5–10 years expect to see businesses and nations alike work furiously to remove their dependency on China. While it will certainly have an inflationary impact, it will result in a boom for local industries and allied nations who will be the primary beneficiaries of the reshoring phenomenon that will evolve.

It will ultimately lead to the division of the global economy into one consisting of the west and its allies and another separate economy with China and Russia at its centre. If your country or business is not working to remove its supply chain dependency on China, you face an existential threat when China does ultimately invade Taiwan. Now that might be in 1 year or it might be 10 but the one thing that China has made clear is that it will take Taiwan back in due course and has not ruled out using military force.

So where do you look for safety as you navigate such turbulent times?

Energy is a big one and an obvious one. As well as the infrastructure around securing it. Expect massive investment from almost every country in energy production. In the short term, that means almost any form of energy because of the shortage. But in the long term, it’s going to dramatically accelerate investment in sustainable energy. The UK recently announced energy subsidies and concessions for consumers and businesses that are uncapped but forecast to cost $200b over the next 2 years because of the issue they find themselves in. Imagine if they’d had the foresight to spend that much on sustainable energy over the last decade.

Manufacturing and services are another. Think of any product that is primarily ‘made in China’ and in the future it will be sourced from the best priced western nation or ally. There is a lot of opportunity here. It will increase inflation globally as removing the lowest cost provider from the equation means everything will cost more, but it will be a necessary cost of removing embedded vulnerabilities from the system.

Technology is another. While the sector is broadly out of favour with investors at the moment, technological change is and will continue at a rapid pace. The most obvious area is in the reshoring of computer chips. Everything these days contains them, and the world can’t really operate without them. China currently controls much of this market and the west, especially the US is in a race to ensure they remove their dependency on China in this regard. But beyond computer chips, technology as a broad sector will continue to grow at a rapid pace and in my opinion remains, as it has for decades, the biggest opportunity for investors.

In the long term, we can look past inflation as I anticipate central banks will bring it under control in the next few years. How high rates ultimately go, how high they stay and the damage done to the economy in the short term is another issue. While the world current faces several big issues its worth keeping in mind that these are problems that can and will be fixed. Over the long term I expect there to be significant opportunities evolve as industry moves to protect its businesses and countries move to protect their economies and their national interests.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Reality Check

Last night’s US Consumer Price Index (CPI) figures were the perfect wake up call for markets following Jerome Powell’s Jackson hole speech; dramatically reinforcing the work ahead in taming inflation. Markets fell swiftly and sharply, the S&P500 down 4.3% and the NASDAQ down 5.5% as reality set in. 

Three weeks ago in my weekly note, I outlined what Powell needed to say at that meeting for markets to take him seriously and understand the Federal Reserve’s commitment to reducing inflation. His speech was right on the money, and it was clear that the Fed was going to fight inflation as aggressively as required. Markets reacted as you’d expect initially and retreated, but only momentarily. It didn’t take long for the focus to turn to the CPI figures coming out last night.

The market, again overly optimistic, assumed inflation was going to fall hard. Ironically, when the sentiment becomes negative, commentators and strategists preach caution and the merits of staying data dependent. They insist it is prudent to wait to see what the data says before becoming concerned. The problem is that these same people (most of the market) forget that philosophy when they are expecting good news.

Consequently, the share market quickly talked itself into a scenario where the environment for inflation was rapidly falling. The implication being that interest rate rises would be short lived. Last night as I watched the US premarket open on Bloomberg TV, almost every market strategist who came on the show talked about how a ‘soft landing’ is a reality and that interest rates will be on hold after the next couple of CPI results.

At 10.30pm AEST the mood changed very quickly. The US CPI result was an upside surprise. The inflation figure was 8.3% instead of the 8.1% expected. Core inflation was up from 5.9% to 6.3%. Last night’s data is a game changer. It removes any hope of a dovish Fed that will halt or cut rates anytime soon, so markets need to recalibrate their expectations quickly. The CPI data confirmed that not only is an interest rate hike of 0.75% next week in the US locked in, but it puts a full 1% hike on the table, with more in the months ahead.

The narrative of transitory inflation that was slowly returning vanished. It means in the short-term, interest rates going much higher. Bond markets adjusted quickly as the 2-year US bond yields instantly went from 3.5% to 3.7%. Keep in mind a year ago they were 0.3% so we are talking about once in a generation maybe once in a lifetime moves. It’s quite incredible. 

Share markets reacted as you’d expect and, in my opinion, this was the reality check markets needed. There was a merry-go-round of the share market rallying because firstly it didn’t believe Powell would be tough on inflation. Once it understood post Jackson Hole that he would be tough, it morphed into a market that didn’t believe inflation would be hard to get rid of. Last night everyone realised, perhaps for the first time, that both inflation will be hard to stop, and that Powell will do what is needed to stop it.  

There is so much work to be done by the Fed before rates can pause and a lot more before they come down. After several false starts, the rally has finally stopped. We have persistent inflation that has become broadly embedded in the system. Mortgages, rents, wages, food, and energy bills are all going higher. Stagflation is quickly becoming the base case scenario. A situation globally where we face high inflation but no growth.

Keep in mind the backdrop to all of this is the worst prospects for the global economy since the GFC. To me, it seems obvious and unavoidable that Germany is headed into a deep recession and that it will take the rest of Europe with it. You have a nation at the start of an energy crisis in such a bad position that their manufacturing plants are closing because they can’t afford the energy bills. The German economy is on the brink. I expect the debate in the months ahead will end up being about whether the rest of the world economy is dragged down too.

From a share market perspective, I continue to expect this market to fall and retest the June lows. The key for investors to ride this out is to continue focusing on the long term and to hold only the highest quality companies. We continue to be overweight cash. For those holding cash, this will become a great buying opportunity in due course. We continue to be patient.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The best life I have seen anyone live

This Sunday just gone was the 1 year anniversary of the passing of my incredible nephew Nathan Garcia. I had the privilege of delivering the eulogy at his funeral last year. When I reflect on it, I realise that my worst days are easier than his best days ever were. I am reminded that none of us have any excuse for not getting everything we can out of ourselves and our lives. I’ve included the transcript below because I can’t think of a better insight into a live lived well than Nathans. He lived the best life I have ever seen anyone live. 

Nathan’s life

Born with half a heart and then developing a severe form of scoliosis Nathan was burdened with not 1 but 2 life threatening diseases. He had so many surgeries that he himself lost count. He was in pain and discomfort every day.

But Nathan’s story is a happy one, about a remarkable life, lived under the most difficult of circumstances.

He was a kid with ambition and aspirations. There were things he wanted to do, and he wasn’t scared to have a go. He wasn’t one to sit back and wonder. Nathan took charge and went for it. YouTube creator…done. Basketball at the local league…done. Enroll in a new course…done. Travel and see the world…done. Go to sporting events…done.

When you think of the toughest person you’ve ever met you don’t expect it to be an 18 year old weighing 27kg. 

But for me, that’s what Nathan is.

He was physically tougher than anyone I’ve ever met. But it was his mental toughness that really set him apart. It’s one thing to deal with adversity but quite another to step up time and time again, for your entire life.

It was the German philosopher and poet, Goethe, who said about life: “Enjoy when you can, endure when you must”.

It was the Austrian philosopher and psychiatrist, Victor Frankl, who said: “Everything can be taken from a man but one thing; to choose ones attitude in any given set of circumstances.”

But it was Nathan Garcia who said:

“Hey Uncle Dion, when are we playing NBA2K next? I’m gonna kick your ass”

Nathan was the living breathing example of whatever your favourite quote about life tries to explain. He lived every day to the fullest. He didn’t dwell on his problems. He dealt with his situation as best he could and moved forward. He didn’t let it define him or stop him from doing the things he wanted to do.

Nathan was a combination of juxtapositions, contradictions, and opposites: 

• He suffered but was happy

• Was kind but fierce

• Considerate and generous but super competitive

• He seemed weak but was strong

• Small but larger than life

• A boy who became a man who enjoyed life despite his hardships

• And though now he’s gone he’ll be with us forever

As heartbroken and as sad as we are right now, and as deeply as we will feel his loss, the story of Nathan’s life is a happy one. It is a triumph of his spirit and a celebration of his resilience in the face of insurmountable odds. 

Nathan’s people 

Nathan loved his all family and friends.

He loved his Mum and Dad. He loved Callum and Emma.

He loved his grandparents, uncles, aunties, and cousins.

He loved his best mate Bhodie.

He loved Mary, Jayden, Damien & Nate.

He loved his dog Lannan who I probably should have listed first.

These are the people he would talk about most with me, but I know there are many more.

When I think of Nathan, I think of my sister Monique. Just after he passed, she sent me a message saying, ‘I was his person, and he was mine’. They were a team, and they will be forever. 

Monique, to me your greatest achievement will always be getting Nathan to his 18th Birthday. You raised your child to become an adult. You did that. But I know you will be relentless in continuing building on his legacy. To quote Kobe, “the job’s not finished”. 

Bhodie, you were an incredible friend to Nathan, and I know you haven’t had it easy either. Nathan would have loved that you’re now in the Ballers group chat and I can already see from your quirky posts why you meant so much to Nathan. I want you to know that you haven’t lost a friend, you’ve gained all of us as family. 

Nathan would do anything for any one of his friends or family.

When my sister Angelica got married, we were also stuck in lockdown and unable to attend. It was Nathan who contacted me and said he would hide his phone and quietly facetime me so my family could watch the ceremony. We watched a combination of the ceremony and Nathan’s face as he constantly peered into the camera to make sure we were able to see. 

Nathan also had the most wonderful quirky sense of humour and was very funny and quick witted. He loved to stir people up and be part of prank or a joke.

Knowing he was on his way to dinner with his Nonno I suggested he look at the menu and wonder out loud “hmm what’s the most expensive item on the menu” and watch Nonno’s reaction. He was all in. Soon after I received a message from him. “Nonno’s a tight ass he said to buy my own.”

He thought that was hilarious. They seem like silly little stories, but they are all examples of the fun that you had when you were around Nathan.

Nathan’s passions and achievements

Nathan achieved more in his 18 short years than most could in 100 years.

Nathan was extremely intelligent. His knowledge on any topic he was passionate about was at an expert level. He not only understood strategy, but he also understood the nuance and subtlety of all the topics he was interested.  

Nathan loved sport. He loved NBA basketball and AFL footy. He loved video games. He loved Pokemon. He loved YouTube. 

When I say he loved sport, I mean he was crazy about his favourite teams, especially the Phoenix Suns, the Essendon Footy Club, the Perth Wildcats and West Perth football club. And it went both ways. Every one of those organisations showed him love too. They all went above and beyond in creating some of the greatest moments in his life. For that we will be forever thankful.

He saw all his favourite teams play live, including a trip to the USA in early 2020 to see the Phoenix Suns. He met all his favourite players including Devin Booker from the Suns and Damien Martin from the Perth Wildcats. He met Lazarbeam his favourite YouTuber. All were incredibly generous and kind to Nathan.

But Nathan didn’t just meet people, he got to know them, and they got to know him. The relationships he built with his hero’s was remarkable and I know they were just as much in awe of Nathan as he was with them.

We set up a group chat a few years ago with 5 of us, Nathan, Callum, Mary, Will and I, to talk about all thing’s basketball and NBA2K. Every day the ‘Ballers’ group chat, as it was called, would provide a new meme, a terrible take or hilarious video. Perhaps the most satisfying post came from Nathan on the 2nd of January this year after a Phoenix Suns win when he declared:

“After all this time… I can FINALLY say the Suns are the BEST team in the NBA.”

Nathan was also a YouTube content creator with aspirations to be like his idol Lazarbeam who has over 19m subscribers. We would get occasional updates as Nath hit his own subscriber milestones, 10, 20, 30, 40. He currently has 42 subscribers and I suspect there is nothing that would please Nathan more than for me to give his YouTube page a shout out and get him to 50 subscribers. I can picture him fist pumping and yelling ‘YEAH’ as I speak.    

Goodbye to Nathan

Dear Nathan,

I’ve never seen anyone show the resilience and fight that you and your mum did. You were meant to die at birth but you refused to give in.

Every birthday was meant to be your last. But you kept fighting. For 18 years you fought. You gave it everything until you had nothing left to give.

And what a life you lived. Despite all the pain and all the problems. You lived life, travelled and met people most can only dream of.

I will miss your humour, your questionable basketball takes and your contributions to our “Ballers” group chat.

I will miss playing NBA2K with you online, your cocky trash talk and complete lack of humility when you won. I will miss letting you win.

I will miss the passion with which you followed sport and lived life, your all in attitude and your happy outlook in the face of daily adversity.

You don’t need to suffer anymore. You were brave beyond belief. You can rest in peace, without pain now young man. I am so proud of you.

I will miss you.

We will all miss you. 

I love you little man x

Heroes and Role Models

Legendary investor, Ray Dalio, founder of hedge fund Bridgewater Associates tweeted recently:

“I think it’s a really good thing to have role models and heroes, which our society is lacking and in desperate need of.”

It is a really powerful statement. It captures the underlying problem building for many years and now manifesting in the form of the many crises the world now faces. A world plagued by short-term thinking and transactional relationships across business, politics and even sport.

When I was growing up there was no internet. My kids call this period ‘the olden days’. I call it the 1980’s and 90’s. Back then your role models were your parents, and your heroes were footballers. Choices were simpler. My role models, by default, were my dad and my uncles, hard-working blue-collar men. My heroes were Michael Jordan, the greatest basketballer to ever play the game and John Worsfold, the tough as nails West Coast Eagles premiership captain.

In the age of social media, how and who people chose to be their role models and heroes is a very different process. From B grade celebrities to Instagram influencers through to YouTubers and TikTokers, the choices are almost unlimited. In the fight for clicks and the attention of followers, the world has degenerated into a free for all of the loudest and most controversial. In many cases, there is no real substance to the people we follow and aspire to be like today. The content as fake as the people promoting them. Even sport today has become a place for highlights and showmanship over team and sportsmanship.

All I know is what I learned. From my dad and uncles, I learned about hard work, being a man of your word and having respect for others. From my coaches, I learned to play the game of basketball the right way, as a team. As a kid, I learned so much from my heroes, John Worsfold and Michael Jordan. Both were extremely influential in how my mindset developed as a person. Both were renowned for their determination and resilience, their refusal to ever back down and their sheer will to triumph in spite of any obstacle they faced. I absorbed all I could from my heroes. I wanted to be like them, and I developed a similar mind set because of it.

I believe to this day that hard work, integrity, respect, and mental toughness are the most important attributes you can have. Generally speaking, I think these are underemphasised in today’s society, and it comes back to the Ray Dalio quote at the start of this note. Today, society is not necessarily lacking the exposure to role models and heroes, but rather its lacking exposure to the right role models and heroes.

But I’m not all doom and gloom, I don’t think all is lost as it often feels to anyone remembering the good old days. Instead, I think these things go in cycles. It’s like the old saying ‘when the student is ready, the teacher will appear.’ Or as history has shown, the teacher will appear, and the student will soon adapt.

One of the most ironic benefits of the difficulties we have ahead of us from an economic and geopolitical standpoint, over the rest of this decade, is that it will lead to society refocusing on what really matters. At that point, we will see what the world needs most, real role models and heroes, who were always there quietly setting the example for when we are ready to see it.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

All eyes on Jackson Hole

In the last 6 weeks or so the market has rallied strongly. While this is always welcome and gives everyone time to regroup, it is my opinion that these gains still fall under the category of a relief rally in the middle of a bear market. But before I get into that, let’s take a look back before we look forward.

Back in June, the US Federal Reserve and its chairman, Jerome Powell, provided some commentary following their latest interest rate increase of 0.75%. The market interpreted their language as an indication that they will not increase interest rates as much as the market was thinking. The market is wrong on this point. To make matters worse, the markets started to factor in interest rate cuts in 2023.

This is the same pattern of miscommunication errors the Fed and financial markets have been making ever since inflation became a problem. It’s a complex and flawed relationship but neither side seems to be able to be honest with each other. At best, the Fed continues to sugarcoat the situation and at worst, is incompetent. Share market investors, always happy to misinterpret the absence of bad news as good news, continue to be enthusiastically led down the garden path by the ambiguous and sloppy communication of the Fed. 

So, from that point in mid-June, in the absence of bad news resulted in a bigger rally to the point of becoming a mini bull run in early August. To be clear, there was no fundamental reason for this to happen. But once it got a little momentum it was always going to continue…until told otherwise. By told otherwise I mean by the Fed being clear and deliberate in their communication about raising interest rates or economic data doing their job for them.

Unfortunately, reality catches up at some point. I think we are at that point now.

Everyone knows the rally has pushed the share market up too high, too quickly. Chairman Powell has been forced into a corner and will need to set the record (and markets) straight. As luck would have it, this week is the Jackson Hole Symposium, the annual meeting of central bankers from across the world. This is the perfect (and much needed) opportunity for Chairman Powell to unequivocally state that when push comes to shove, they will choose to raise interest rates to kill off high inflation.

What he needs to say is this:

“The US economy is well positioned. The US consumers have solid balance sheets. Both have proven resilient in the face of difficult times. We expect there to be more uncertainty in the months ahead and it is possible that the economy and economic growth will slow. However, the biggest threat to our economy and our standard of living is inflation. So as long as inflation is above the range of 2-3% we will continue to raise interest rates. That is our top priority.”

If he says that share markets will fall significantly. Bond values will fall too as yields increase.

But it is necessary to say it.

If left unsaid, then he only creates a more severe disconnect between markets and reality. Powell and the Fed will lose even more credibility if they continue with their wishy-washy and ambiguous language. I believe the Fed and Powell should have realised from this latest share market rally that their language is betraying them. They have acted to push rates up and they have been prepared to go up in hikes of 0.75% when only a few months ago it was unthinkable. But their subsequent comments in press conferences have allowed the share market to change the narrative to suit their short-term agenda.

So, I expect Powell and other central bankers, such as the UK’s Andrew Bailey, to emphasise the threat that inflation poses to the global economy. At Jackson Hole, there will be other central bankers speaking too and the inflation situation in other western nations is even more dire. The UK for example now sits at 10.1% inflation (as of July 2022) and with the energy crisis taking hold the most recent forecast from major institutions such as the Bank of England and Citi have inflation in the range of 13%-18% by early 2023. If the Fed address their language correctly it will turn the mood of the share market back into bear territory, and in my opinion, we will retest the share market lows of June, but it will ensure that the appropriate line in the sand is drawn for the battle ahead.

If they leave any room for doubt or ambiguity in their message, then it tells us that Powell and the US Fed have their head in the sand and are quietly hoping that inflation magically disappears. Now it is possible that supply chain woes unwind and all inflationary pressures on the supply side do ease. But this cannot be the base case. If they get that wrong, they are setting up the global economy for the worst of all scenarios and risk many years of stagflation across the world. That situation would be far worse for both share markets and the global economy in the long term than putting up rates too high in the short term. Markets will sort themselves out in the end regardless, but the path can be made significantly simpler by taking the medicine required sooner rather than later. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Selling your business? What happens next?

Somewhat surprisingly following covid, the lockdowns and recent downturn in sentiment, there has been a significant increase in corporate activity resulting in family or founder led businesses being acquired by larger listed local and overseas organisations. Many of these deals have materialised this year but are really the result of negotiations over the past 1-2 years, before any downturn.

Imagine you are a founder selling a business for $10m or $100m. Once you sell there are two very different challenges you are faced with next. The first is the business transition and the next phase of your life. The second phase is dealing with what is often newly acquired generational wealth and setting up structures and investments for your family for years and decades to come. This can be daunting and stressful.

When you’ve been running a business for the past 10, 20 years or more, once you’ve sold it is a significant transition to manage. The way the sale is structured will provide a transition framework by default, often with a 1-3 year earn out. This is effectively a bonus component which is in place to incentivise the founder to stay on, stay engaged and make the transition work for all stakeholders. But importantly this also facilitates the founder’s psychological transition into the next phase of their life too.

Despite all the due diligence you might do, it is rare to find that perfect partner to buy your business. It is ultimately a sale, and you will need to become comfortable that you are exiting the business over the next couple of years. I have found that despite the best of intentions from all sides that once you move from being the founder, making all the decisions, to the manager of that business there is a culture clash with the new ownership. It makes it difficult for any founder to stay involved beyond their ‘earn out’ transition period. 

So, think about how long you want that earn out transition to last. One year will pass quickly but three years can become a grind for entrepreneurial founders who quickly feel trapped by the lack of autonomy and increased bureaucracy that inevitably follows. But life keeps moving forward. The earn out will take care of itself as will the shares component the owner is paid by the acquiring company. Typically, the largest component of the sale is in cash. Once the sale is completed and you’ve got the cash in your bank account – what then?

When you run a successful business with good cash flow there’s enough money to do all the things you want. Lifestyle is funded by an ever-growing business, so money isn’t much of a concern. But that mentality changes once the business is sold and it is confronting. Suddenly you have a quantifiable amount of money – this is what you have for the rest of your life, for you and your family. Big or small, that is the figure you have to work with now. It can be daunting. 

For most people, it is much more stressful than you would think. It seems surprising but it’s a very common and reasonable reaction. In most cases that cash represents most of your life’s work and most of your net wealth. The next thing that hits you is that you realise that while you are excellent at running your business, you don’t really know much about managing investments or generational wealth.

So, what do you do next? Here’s my advice. Do nothing. Settle. Leave the money in the bank for 3-6 months. Do not rush. Take a breath and compose yourself. Take a holiday. Some people are better at this than others. Take that time to decompress. 

Only after that phase of processing a lifetime’s work and the pending change should you start thinking about the next steps. Good decisions are not made quickly. So, it’s important to have a clear mind and remove the emotion from the equation before you think about the future. Only then are you really ready to plan your next steps with regards to the big picture, structures, and investments.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Why High Inflation Is a Big Deal

In Australia, our inflation rate has been moving up fast, hitting 6.1% in figures released today. In the US, UK, and Europe inflation is even worse, in the range of 8% to 10%. At that level, it can start to become quite entrenched and destructive.

This is why Central Banks across the world are in a mad scramble to raise interest rates. Once inflation gets out of the 2%-3% range it’s time to nip it in the bud. Central banks got the inflation call wrong initially, they sat on their hands for too long and inflation got away from them.

The only real way to get inflation under control is to raise interest rates. Otherwise, inflation becomes so high that demand is destroyed because no one can afford to buy any goods or services anymore. That’s a far more precarious position for an economy to be in. Prevention is far better than the cure.

But first, why does high inflation matter so much?

From an individual’s perspective, inflation reduces your buying power, your standard of living and your wealth in real terms. If you earn $100,000 a year and inflation is 6% you need a pay rise of 6% and an income of $106,000 just to stay in the same position. If you get a pay rise of 4% you actually went backwards by 2%. If your income doesn’t keep up with rising prices your standard of living falls because you can’t afford what you could before.

From a business perspective, inflation means rising costs and unless you can pass them all on to the customer then it means your profit margins are going to be squeezed. Even if a company can pass price increases on it may result in less sales as you raise prices and so profits reduce anyway. If profits fall so do company valuations.

From a national economy perspective, if inflation becomes embedded it can destabilise the currency and if left unchecked lead to hyperinflation and economic collapse. While that’s something more often associated with developing nations, these are the types of risks that can occur if inflation runs rampant for an extended period. As living standards fall, all sort of economic and social unrest comes into play.

The bottom line is high inflation must be dealt with – whatever the cost. Getting inflation down to 5% to 7% range in the US and Europe will be a big improvement, but that’s still way too high. Inflation also tends to roar back to life quite quickly if you don’t extinguish it properly the first time. Inflation must be brought under control properly to create price stability in the global economy.

It has taken far too long for Central Banks across the world to understand that. It does appear that finally the penny has dropped. Central banks have now collectively realised they need to choose whether they tackle inflation or assist financial markets and economic growth. They can either raise interest rates and kill inflation or they can keep them low to support the economy.

But you can’t do both.

The usual situation, historically, would be raising rates in a strong economy to slow it. Often the result is a recession. The balancing act is raising rates while trying not to pull the hand brake on too fast, damaging the economy in the process. That’s easier said than done. Usually, central banks tend to raise rates too high and leave them high for too long. Usually, it is because they’ve been too slow to act initially.

The current situation is far more difficult. We’ve not seen a situation where central banks have had to raise interest rates going into a weakening global economy. The real risk, especially in Europe and even in the US is that the level of rates needed to tame inflation is higher than the economy can cope with. The potential result being that the choice to raise rates to stop inflation will have dire economic consequences.

So, the reality is this process will still take many months to play out. For some reason markets still talk about Central Banks to engineering a perfect soft landing. Great if it happens, but I’m not sure you can expect the same people who were unable to identify the problem and address it in a timely manner to suddenly thread the needle when it matters most. I am hopeful for a shallow recession but preparing for worse. 

Regardless, I would rather they eliminate the threat of inflation. It will make for a more difficult downturn, but the world economy will eventually recover. If you let the inflation genie out of the bottle, then you risk all sorts of potential unintended consequences evolving and ultimately a far worse economic situation later. Unlike the past 15 years, I would hope central banks have learnt their lesson and will take their medicine sooner rather than later. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Should You Start a Business in a Bad Economy?

My 20-year-old daughter, Rachel, is embarking on a new business making boutique candles. She’s only just starting out and making them at night and on weekends, but she is really excited about it and has big plans. As we spoke about it, she asked me an important question that was causing her some concern. She asked, “should I be starting a business if the economy is going bad?” 

My answer was instant and unequivocal. Yes, you should 100%. Start it, give it everything you have and see what happens. You will either succeed or you will learn valuable lessons for next time. Never let the economy or other external factors stop you from having a go. There will never be a ‘right time’. Find something you love, forget the fear and do it. Be the best at what you do.

I would also add that you should do this as early in life as possible. It is far easier when you are young and have fewer commitments. But even when you are older if you want to pursue something go for it. There’s nothing like the pressure of starting a business to focus you on the task at hand. These days with more flexible work, it’s much simpler to start a little side business and build it up while still having the safety net of employment. It takes hard work, discipline, and commitment but if you really want it, go for it.

Just because times are tough or going to become tough doesn’t mean that you shouldn’t start a business. It should have no bearing on your choice. There will always be opportunities and a business that starts in the depths of the toughest times is very well positioned to prosper as the economy improves and returns to good times later. That goes for the smallest businesses through to the biggest.

On my most recent podcast, I interviewed Rhian Allen, the founder of The Healthy Mummy. Her story is great! Rhian started the business in 2010 as the world was emerging from the GFC. She was 6 months pregnant and discovered a gap in the market in relation to fitness for mums. She left her job and sold her house to fund the business. Rhian sold the business in March this year for almost $20 million.

I circled back during our conversation and asked how she felt on day one of starting the business. Was she a little scared? Her answer was very much in line with everything I had learned about her and the energy she brought to the conversation. She replied “no, I was just excited about doing something I loved. If it didn’t work out, I could start again.”

It reminded me of the time my wife and I packed up our little family of four kids in 2003 and embarked on the move from our hometown in Geraldton in country WA and moved to Perth. One conservative old Italian Aunty took me aside and said “Dion, this is a big move, you’ve got a young family, what if it doesn’t work?” My answer was instant: “Then we will just get in the car and drive back”. She gave me a pained expression and muttered something about it being a big move as she walked away shaking her head. 

It highlighted to me that many people perceive the risk to be high when it involves significant change but when you understand the worst-case scenario, the risk is actually quite limited. If you are the sort of person who becomes concerned about failure or having to start again then perhaps business isn’t for you. But where you understand the worst-case scenario, and you are ok with that, then take the calculated risk and go for it. That’s the opportunity. 

In their heart, most people know what they would do if they were guaranteed to succeed. Most hesitate because of a fear of it not working. So, I would ask, what would you do if you were guaranteed it would succeed? As the answer to that question is what you really want to do. Life is too short to let anything get in the way of that, including a bad economy.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Phase 2 of the Bear Market

The way I see this bear market playing out is in 3 phases. The good news is we’ve already been through the first phase. That was the first 6 months of the year that saw the S&P500 in the US down 20% and the NASDAQ down 30%. The first phase was all about inflation driving interest rates up and the subsequent one-off re-rating of asset prices that followed. In that situation there is no recovery or bounce back per se, it was an adjustment due to the mathematics involved in valuing assets. Higher interest rates mean lower asset values. In simple terms that 20% fall was the result of interest rates moving from 0% to 3%.

That was phase 1.

Phase 2 is all about what happens over the next 6 months. I’d separate this phase into 2 parts. The first part is all about the downgrades in company earnings we can expect during that time. How severe those downgrades are will determine how markets perform next. Many institutions haven’t updated their forecasts for specific company earnings or entire sectors simply because of how difficult forecasting has become in the last few months given all the volatility in the world. From the price of commodities through to the impact of unprecedented currency moves, these will all impact company earnings.

You only need to look at the price of oil to see just how difficult forecasting is right now. You can find forecasts from leading investment institutions that range from $65 a barrel to $380 a barrel and anywhere in between. The thing is both ends of the extreme are plausible within the context of the scenarios outlined with competing forces of recession risk versus chronic underinvestment in an essential commodity. Currency is another issue. The continued strength of the US dollar as capital moves to perceived strength and stability is starting to reverberate across the world. The Euro is basically at parity with USD now and the Yen has plummeted against the dollar.

Earnings season in the US for Q2 begins at the end of the week and over the next several weeks will provide a glimpse into the real impact all these variables are having on businesses’ bottom lines. In Australia, we will see companies reporting their full year results in August. How earnings look this quarter and the next two will really dictate how deeply the slowdown is going to bite and how quickly markets stabilise. The issue has been compounded by companies becoming increasingly reluctant to provide earnings guidance along the way due to the unpredictable nature of the current business environment. But that only makes the situation worse when the actual results come in below expectations and analysts are caught off guard and need to adjust quickly and dramatically.

The second part of phase 2 is all about the potential for shocks to the system in the next 6 months. There are mini disasters everywhere in the world right now and we only need one to spiral out of control to send the financial world into a panic. It could be a currency break down or a bigger country with a Sri Lanka type problem, an energy shock, or a genuine black swan event. But there are just so many more issues than normal bubbling below the surface that I don’t think markets are adequately weighing the risk of something breaking. Every one of these machinations has a consequence and it won’t take much for something to break and create a more severe dislocation in markets.

In that mix of variables, we’ve got a US inflation report out tonight and the Nord Stream 1 gas pipeline between Russia and Germany being closed for 10 days for annual maintenance. There are real fears that Russia may not turn the gas back on. I think this is a real threat and if it comes to pass would cripple both the German and European economies. Regardless of timing, it remains a threat to Germany’s economy, and by extension Europe’s until they have removed their reliance on Russian energy.

Phase 3 covers the first 6 months of 2023 and will be all about where interest rates finally settle as we head into the new year. For many months markets have assumed about a 3% Fed/RBA rate. Once we come out the other side of the earnings adjustments the next question will be, where do rates end up? The risk being that Central Banks increase rates much further than needed for fear of being out of line again. Happens every economic cycle. My view is that Central banks will be forced to raise higher for longer to extinguish inflation and to ensure that it does not return as it did in the 70s and 80s. That’s going to be difficult if the world exits phase 2 in a recessionary environment.

So, the next 6 months will be critical for investors, and I will be pleasantly surprised if company earnings prove to be resilient. However, if consumer spending falls off a cliff, which I do expect, then businesses will be in for a tough time. It’s impossible for the average household to maintain their usual discretionary spending when they are being hit with massive hikes in mortgages, fuel, energy, and groceries simultaneously. There’s simply less money to spend on everything else. Companies are going to notice it. If not this quarter certainly in the next 2. Almost everyone will need to tighten their belts and make hard choices about their discretionary spending.

I would expect within the time frame of phase 2, between now and the end of the year, we are going to see markets really start to work out the magnitude of the issues at play. I expect the market to fall further and find a bottom in that time and that the investment opportunities we have been waiting for will come sooner rather than later.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Even Keel: What investors can learn from Lebron James

You can learn a lot by watching the highest performing people when they are under extreme pressure, regardless of their field. Their words, their actions, and their body language. In the 2016 National Basketball Association (NBA) playoffs, Lebron James and the Cleveland Cavaliers were down 3 games to 1 in the best of 7 finals series. No team had ever come back to win the NBA championship from such a deficit. In his media interviews when asked about his performance, good or bad, Lebron continued to emphasise the same two points I had heard him repeat in almost every interview throughout the season. He would say:

“I don’t get too high or too low, I stay even keel and will just keep working on my habits.”

To start with, it seemed like the usual ‘athlete talk’ to the media, keeping it simple and not giving anything away as they are trained to do these days. But over the course of the year, it became increasingly clear that this is what he lived and breathed. This insight was as simple as it was profound. He didn’t waiver and led his team as they won the series 4 games to 3 in one of the greatest comebacks in sports history. This is the mindset that makes him one of the greatest basketballers of all time.

Hearing these comments consistently, in interviews during the season and playoffs from one of the greatest athletes ever, highlighted to me what it really takes to perform at the highest level in both the good times and the bad times. The key to performing under pressure isn’t what you may think. It’s not about the spectacular, it’s about the consistent. It’s not exciting, it’s boring. It’s not about the score, it’s about the process and the discipline. If you get that right, if you play the right way, then the score board will eventually take care of itself.

From a psychological perspective, we can learn a lot from elite athletes in managing our own temperament as investors. It’s human nature to get caught up in the hype of the economic good times. Regardless of the macro-economic environment that created it, we expect that is the new normal rather than a boom. Conversely, when the eventual downturn comes, we become overly negative as we see that ‘new normal’ evaporate before our eyes.

As difficult as the past few years have been for everybody, firstly with the pandemic and now moving into an economic downturn and a range of global issues, staying even keel, and working on your winning habits and process are more important than anything else. Remember that nothing is generally as good as it seems and nor is anything usually ever as bad as you fear. There are only certain things you can control, and they are the areas where you need to focus.

So, while I can see there is an ever-growing list of challenges that the world faces the best way to approach it is to be pragmatic. It will not be as bad as many fear and at some point, we will come out the other side to better times. I will always be optimistic about what the future holds for us as investors and for the future of the world more broadly, regardless of how difficult conditions feel. But in the meantime, there is work to be done so we may as well just get on with it. There will be great businesses that emerge from the toughest times, and great investments to be made too.

Stay even keel and keep working on your habits.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The West is underestimating Putin

Many in the West have mocked Putin given the ineptitude of Russia’s military forays against Ukraine so far. Financial markets have quickly adjusted to the new norm of war in Ukraine and moved on. However, we should not be so quick to dismiss the apparent lack of Russian success as failure nor become complacent and underestimate a dangerous foe. 

“Appear weak when you are strong, and strong when you are weak” Sun Tzu, The Art of War

From a strategic perspective, Putin is in a far stronger position than is portrayed by both the western media and its leaders. Sanctions are having little real impact. Russia is selling its oil to India and China and its currency has recovered from the initial shocks. Reports of massive bond defaults make the news and are well timed for the current G7 meeting but are effectively inconsequential at this stage. It is not an issue for Russia, it is an issue for the investors who are unlikely to ever get their money back.

It is clear that the Chinese and Russian governments are working closely together strategically. This is not a short-term strategy based on a few months. This is the early phase of a multi-decade alliance along with other emerging nations to rise against their common enemies. When we consider the situation from that paradigm it becomes easier to understand the next steps coming and how the future may play out.

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Winston Churchill

I see 2 strategic objectives unfolding for Putin. Neither have anything to do with Ukraine. I have come to believe that the war on Ukraine is simply to start the process, it is a convenient smoke screen for Putin to set the narrative at home. The first objective is to break up Europe. The second is for Russia and China to align and dethrone the US as the economic power of the next 50 years.

It is critical to understand the timeline when considering the possible bigger picture strategy at play. The next couple of years are where Russia has its strongest leverage over Europe with shortages in energy and food. Critically, now that this conflict has been set in motion, Putin knows this advantage exists for only 1-3 years until Germany and the rest of Europe find alternative sources of energy.

“The supreme art of war is to subdue the enemy without fighting” Sun Tzu, The Art of War

Regardless of how it came to be, Putin finds himself in the position of controlling the energy supply to Germany and much of Europe. If he limits or turns off the supply of gas to these countries who are dependent on Russia for their energy, he will bring those countries to their knees. From manufacturers to industrials, they simply won’t have the supply of energy to function, their economies will be decimated. The social and political consequences will be disastrous.

With rising inflation in Europe and increasing instability from the growing economic downturn, it will be difficult to stop Europe from fragmenting around the edges as the weakest nations deteriorate. Combine that with a dagger to the heart of the German economy and Europe will be in a very precarious position in every way.

“Our strategy is to destroy the enemy from within, to conquer him through himself” Adolf Hitler

The part that I think is being dramatically underestimated by financial markets and world leaders here is Putin’s willingness to use this advantage to the fullest extent of his powers. I do not believe he will hesitate to do so at the most advantageous time for Russia. It is not a negotiation, it is war. The next 2 winters in Europe will be critical. I would expect Russia to significantly escalate during this period either covertly with extended ‘maintenance’ of the critical gas pipelines or overtly by claiming a ‘justifiable’ retaliation.

Either way, everyone needs to understand that the economic and political stability of Germany and the rest of Europe is at the mercy of Putin. We cannot think like reasonable and kind people to understand what an authoritarian dictator will do to his enemies during a war. That is a mistake that has been made since the beginning of civilization. We must put ourselves in his shoes in order to understand what comes next. While many wish for Putin’s demise, there is no guarantee his replacement will be better. In fact, they may be worse.  

“Divide et impera” Julius Cesar

Simultaneously, that will be a critical time for China. A month into the Ukraine war I considered a Chinese attack on Taiwan to be off the table in the short term given the apparent blunder by Russia and the subsequent sanctions. However, if Russia moves to weaken the European economy over the European winter, I think it becomes more likely that China moves on Taiwan too. It makes too much strategic sense to launch these attacks simultaneously while the US and Europe are at their weakest. Simple divide and conquer strategies.

Nothing I see from the leaders of the G7 nations tells me they are prepared for what’s coming. All I see are carefully orchestrated PR announcements designed to placate their own. The reality is they are all so preoccupied at home with the economic and social stress of inflation that they are all struggling to hold onto power domestically. That is not a situation conducive to unity when economic factors deteriorate the situation into an ‘every country for themselves’ situation.

The events I have outlined above may eventuate or may not happen at all, but from an investment perspective, I am more cautious to ensure we protect the downside risk. Often that simply means being aware of the possibility so that when you invest you are placing sufficient weight on the probability of an event occurring. Currently, there is little realistic big picture consideration by markets of how the war progresses from here. It is worth being prepared.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Cash is still king (for now)

Right now, we are in one of the most unusual times for investors in history. The reversal of easy money as inflation bites for the first time in over 15 years has made managing money especially difficult. Where do you put your money? Where do you hide? There is no simple answer. Almost every asset class is going backwards. Shares down 20%. Bonds down 12%. Fixed corporate bonds down almost 20%. The property fall is starting now that rates are rising. None of these are great returns when considering where to deploy cash, so we wait and continue to hold a significant portion of our portfolios in cash.

Why do we hold so much cash? When you’re getting somewhere between 0%-3% and inflation is 5.1% it’s still not a great option. In real terms you’re going backwards. But where else would you rather be when every asset class is falling? In the past 6 months cash has been easily the best performing asset class. While other asset classes continue to fall and opportunities emerge, I still believe it is very likely many of those same assets will be cheaper in the next few months. So, while we look forward to investing our cash as soon as possible, there are very few places to deploy funds right now.

One of the lasting lessons I took from the GFC 15 years ago was that the most experienced investors and companies were not only in great shape going into the downturn, but they also used those times to buy assets at prices that were previously unimaginable. In the midst of a once in a generation economic collapse, while everyone else was worried about survival, they were able to take advantage of a once in a generation opportunity to invest when no one else would or could. There were many examples but there were 2 deals that stood out to me at the time. 

The first, was Warren Buffett coming to the rescue of the banking system in the fall out from the Lehman Brothers and Bears Sterns collapses. He invested US$5 billion in banking giant Goldman Sachs. But he didn’t just invest. He structured the deal on terms completely in his favour. He bought shares at record a low price, but they were structured as preference shares, so he was higher up the security chain and also received a 10% interest pa for his investment and a range of other options in the agreement. He had the cash available when it was needed most and was able to negotiate the terms he wanted. 

The second, was the Commonwealth Banks acquisition of BankWest for $2 billion. Only the most unusual of circumstances made this deal possible. Firstly, HBOS (Halifax Bank of Scotland) was on its knees and desperate to raise cash through asset sales for its own survival, so it was very unusual to have a forced seller of that sized asset from such a large owner. Secondly, in normal times there was no way that deal was getting past the competition regulator. But in times of a complete breakdown in the system these things don’t matter as the integrity and function of the market overrides everything in an emergency. US banking giant JP Morgan completed similar deals in the US. The strong get stronger.

What I realised then was that in times of genuine crisis is where the greatest deals of your life are made. Deals that would otherwise never be available. It was also noticeable to me that the main deal makers were the old investors who had seen multiple market down turns. They understood that being prepared and patient was key, and they moved in when others were desperate and almost no one else was buying. There is no benefit in heading into a downturn fully invested or worse, highly leveraged. That is more likely to put you on the other side of the deal equation and ending up a forced or distressed seller. These deals are only available to those who are prepared and waiting for the opportunities to unfold. 

In the current situation, it is impossible to know where the best opportunities will arise, and in reality, we will need to continue waiting to see how it all plays out. A lot will depend on just how bad the downturn becomes and how far markets end up falling. There are early signs that technology companies and those in the retail and banking sectors will be likely candidates in due course simply because of how beaten up those stocks are already. When the dust settles in the months ahead those who have been most patient will be in the best position to take advantage of the opportunities that have become the most attractive. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

How Much Further Will Share Markets Fall?

We’ve finally moved into bear market territory. We’ve been sitting on an overweight cash position for most clients for months and waiting for markets to fall sufficiently to deploy these funds. For existing portfolios, we typically have between 20%-30% in cash (or similar) depending on the client and for new clients who joined in the last 6-12 months we’ve held 60%-80% in cash. The main question I’m being asked right now is this:

Is it time to buy?

My answer is no, not yet. The time to buy will most likely be when people stop asking. Investors are simply not yet scared enough. When markets are driven by fear, people no longer want to buy. For all the volatility and the fall in the market to date, we haven’t seen markets truly capitulate into a free fall. That’s when the best buying opportunities will be available – when no one wants to buy. We haven’t seen real fear and I think we need to see that before this market reaches a bottom. The next question I get after that is this:

Just how much further do you think markets will fall then?

Obviously, that’s a difficult question to answer because there are so many variables, and we just don’t know how they will ultimately play out. But I think the falls in share markets so far are really just in relation to interest rate rises being factored in and markets making a one-off adjustment from extremely good times of low inflation and low rates to the opposite. In my opinion, markets haven’t really adjusted for bad news or a bad economic environment. It seems increasingly likely that is just around the corner. I think there are lower corporate earnings ahead and slower economic growth. All of these are yet to be properly forecast by the big institutions and that will likely come next in the form of downgrades. I think there is some way to go before the market finds its low point.

Additionally, we have the prospect of higher interest rates than markets expect. If that plays out, markets will likely fall further to adjust to the shock of a second round of rate rises. For a while, the consensus was that central banks in the US and Aust may end up at around 3% but it looks increasingly like that it is going to be north of 4%. Keep in mind that central banks are always behind the curve on these calls and then they panic and over tighten. We’re starting to see talk of bigger rate rises at the next meetings of 0.5% and 0.75% but to me, they are not panicking yet, that’s just them catching up to reality. The Central Bank panicking comes later when it’s obvious to everyone that they’ve caught up, but they keep raising rates.

This is clearly a once in a generation recalibration for the global economy. However, the flipside is that I don’t believe (at this stage) it becomes a GFC style event where markets fall 56% or a 1929 style crash that led to The Great Depression where markets fell 89% (not a misprint!). At this stage, there is no evidence of the level of systemic problems within the global economy that occurred during those events. The global banking system is strong, and markets are functioning relatively well so far. That’s not to say it can’t happen and I am acutely aware of the potential for black swan events to emerge from left field when there are just so many volatile situations in the world right now.

But my expectation at the moment is that markets finish down from their highs somewhere in the range of 25%-40%. I think that’s fairly realistic. I would be surprised if we are at the low point now. We are certainly getting closer, with markets broadly down 20%, but I don’t think we are there yet. As we enter the next phase, that’s when we will start seeing the sort of buying opportunities emerge that we have been waiting for. That’s not to say there are no opportunities to buy now because as markets fall, I am increasingly seeing specific opportunities in areas or companies I am comfortable buying. But in terms of deploying the large cash positions we have been holding, we will continue to be patient.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Consumer Spending Crunch Is Just Starting

Investment markets are about to enter their next phase as we move from the theory of what might happen to the reality of a consumer-led spending crunch. What we have seen over the last 6 months or so as markets fell has really been based on expectations of how all the variables and uncertainty will play out. I’m referring to the theoretical implications of what was ahead, anticipation of higher rates, anticipation of how higher rates might impact homeowners, how inflation impacts consumers and so on. Overlay anticipation of the flow on effects of the war, the potential impact of the rising price of food, fuel, and energy and it’s been clear for a while that consumers have a few problems heading their way.

But all those variables have now arrived and are hitting consumers in the hip pocket. This is the start of the reality phase. It will be interesting to watch this transition unfold because it takes time for the data to come through and reflect what is happening in a way that investors and institutions can reliably use. It will result in mixed messages and head fakes that will slow down how markets react to the new reality. There will be data pointing to strong spending in certain areas. For example, expect spending on travel and holidays to be strong in the next few months. Commentators will point to this to demonstrate a resilient consumer. But don’t be fooled, that isn’t the case. There will be several of these examples.

The reality is consumers are already saving less and having to borrow more. They haven’t yet adjusted their overall spending habits for their new reality. There might be a lot of pent-up demand for services like travel and holidays, but that’s not representative of a resilient consumer. It’s being driven by the psychological need for people to finally go on that trip after 3 years of lockdowns and false starts through the pandemic. It doesn’t matter the cost; they will go regardless of whether they can afford it. That’s going to change quickly and dramatically as the interest rate increases start to bite, the big power bills roll in, not to mention the astronomical price of fuel and the weekly grocery shop skyrocketing. Consumers will need to tighten their belts.

This will have a dramatic impact on businesses globally. At the end of the day, consumers have a set amount of money to spend. If the price of all the essential spending is going up, a lot, then they simply have less to allocate to discretionary spending. In the very short term, they can use savings and credit cards, but that isn’t sustainable, and consumers will adjust quickly. Wage increases are not keeping up with these increased costs so expecting consumers to maintain previous discretionary spending levels when they simply have less to spend makes no sense at all. Discretionary spending patterns are going to change, and you don’t need to wait for the data to understand that.

So, what does this mean for business and investment markets? The short answer is not good. Recent data from the US retail sector from Amazon, Walmart, Target, and a host of others in the past few weeks clearly tells us that discretionary consumer spending is already being impacted by rising costs and interest rates. Perhaps most concerning is that these big retailers are struggling to cope with the dramatic deterioration in conditions. They have increased revenue due to inflation, but their margins and bottom line are being hit hard. That is a major concern for company profit and valuations.

The initial phase of this bear market has really been brought about by the jump in interest rate expectations globally. That’s forced a re-rating on all stocks. If the market was previously trading at a Price to Earnings (P/E) ratio of say 25, as interest rate expectations went up the market adjusted that to about 20 which equates to about a 20% drop in stock prices. That was just phase 1 of the bear market.

This next phase is all about earnings and if the earnings in that P/E ratio equation start to fall, that is the next major issue for stock markets, the impact of all of this on company earnings. Sentiment will move from concern around inflation and interest rates to concern about growth rates for the real economy, lower corporate profits, and earnings.

From a stock market perspective, this introduces the basis of the next leg down in my view. We are going to see analysts and institutions start to dial down their forecasts further, for economies, markets, and individual companies. Much of the change in markets will be sector specific. We’ve seen the first casualties being tech stocks, construction and most recently retail and consumer discretionary.

It is critical to have your portfolio weighted to the right sectors to avoid the potential land mines that can end up detonating when bad news comes. It seems counter intuitive right now but what’s to come from businesses if their earnings fall will be cost cutting and job losses and the start of a downward spiral for the economy. Consumers are broadly in good shape now, but that is going to change rapidly if cost pressures persist.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

A World Splitting in Two

In the quest for lower costs, efficiency in supply chains and productivity gains, globalisation was pursued relentlessly. It made sense for a long time. Yet, for all the benefits gained from increased globalisation over the last 4 or 5 decades, the Russian invasion of Ukraine has highlighted its major fault lines and flaws. The benefits of interdependent economies and globalised trade in times of war have been exposed as vulnerabilities.

What is evident now is that the world is deglobalizing. But this is happening only to a point. The primary theme emerging is that every nation must make all decisions through the paradigm of their national interest. There can be no sustainability without national security. No trade or investment without first considering the national interest. Moving forward they must go hand in hand. It makes sense that national security and independence of core strategic functions for a nation must be a priority.

Germany will go down in history as the poster child for what can go wrong when economic or ideological objectives are pursued without sufficient emphasis on their strategic national interests. While well intentioned, by becoming increasingly dependent on Russian oil and gas, Germany have left themselves at the mercy of Russia and provided Putin with all the leverage he needed to pursue his military objectives.

When push comes to shove, I have no doubt that Russia will turn off the tap and stop the gas supply to Germany. That will have devastating and far-reaching implication for Europe and its economy. Of course, Germany will give in to any Russian demands before that happens. Look for smaller nations to be hit with cuts in gas supply when the Russians feel the need to fire a warning shot across the bow of Europe. While oil embargos play out well from a PR perspective and placate the masses of concerned citizens across the world the reality is far different. These are relatively ineffective in my opinion.

Firstly, there will be countries that end up buying Russian oil. The opportunity is simply too great for India, China, and a number of other eastern nations to not buy it. The supply of oil will ultimately be redistributed and no doubt other countries struggling without Russian oil will find a willing seller in India or others who are more acceptable nations for the west to deal with. The oil embargo sounds punishing but it’s unlikely to be real and countries will find a way around it out of necessity in my view.

Secondly, Europe is far too fragmented to maintain the unity that initially appeared so promising. As situations within nations become more extreme in relation to both energy and food shortages the leaders of each country will ultimately be forced to do whatever is needed to get their nation through the crisis. Simultaneous food and energy shortages will mean every nation for themselves.

The unity of the European region will face one of its most difficult challenges in its history in the months and years ahead as they face twin crises of energy and food shortages. Putin and Russia, for all their military ineptitude so far, are sufficiently well versed in the region to understand that as the situation for Europe becomes more dire and individual nations suffer that Europe will likely fragment. Putin will press his advantage here in an attempt to divide and conquer.

The changing geopolitical landscape has changed the world forever. We will enter a phase of bifurcation of the global economy. This is a 5–10-year process but it’s already happening. There will be far reaching consequences for the way nations and companies reorganise their operations and supply chains.

This will accelerate the split in the world between the East and the West. On one side US, Europe, and their allies such as Japan, South Korea, and Australia. On the other, I expect far closer bonds to develop between Russia, China, Saudi Arabia, and several eastern European nations, such as Hungry and Serbia. Expect India to walk the tightrope between both sides as they have 1.4 billion people to provide for and are unlikely to have the inclination or luxury of picking sides.

But it is not only nations that need to protect themselves and mitigate these risks. There are significant risks to the world’s biggest companies that need to be addressed too. Having supply chains based in China to build products for customers around the world is now the equivalent of Germany sourcing their energy from Russia. It’s a vulnerability and you can guarantee that companies around the world are working feverishly to build out contingency plans and capacity in other areas of the world. There are many thousands of companies in this position with the highest profile and most exposed being giants such as Apple and Tesla.

While all of this is critical, almost every aspect of this process will be inflationary. From now on the model pursued will not be the cheapest and most efficient method of supply and production, but the one that does not make us vulnerable to our potential enemies. Companies and nations will need to act with urgency to ensure they de-risk their exposure in the decade ahead as the world splits into two competing economies. Any companies that do not address these vulnerabilities will become uninvestable because of the existential risks they face.


General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.