42 CITY
THE WEEK 7 May 2022Talking points
Only last year, many economists were
expecting 2022 to usher in a period of
strong economic rebound. We’d see a
new “Roaring Twenties”, some said, like
the decade of consumerism that followed
the 1918-21 influenza. Fast forward a
few months, said the FT, “and the more
commonly cited parallel is the 1970s”,
when inflation surged to double-digit
rates even as economies around the
world stagnated. Now, after the double-
shock of Covid-19 and the Ukraine war,
“stagflation” is again on the cards,
striking “fear into policymakers because
there are few monetary tools to address
it”. Most analysts and economists don’t
anticipate a “decade of economic blight”
as bad as the 1970s. But with global
inflation forecast at 6% or higher, much depends on the actions
of central banks. The stakes, as both the US Fed and the Bank of
England met to raise interest rates this week, were high.The debate has totally shifted “from whether interest rates have to
rise, to how much they will go up by”, said Simon French in The
Times. This is “the sternest test” of the BoE’s independence since
it was granted 25 years ago. “Telling the public that slower
economic growth today is a price worth paying for lower inflation
tomorrow” won’t win the governor Andrew Bailey many friends.
But he needs to stick with it. “Policymakers have got themselvesinto a terrible mess,” said Jeremy Warner
in The Sunday Telegraph. Because of the
wider problem of over-indebtedness in
the UK economy, “half of corporate
Britain would be in trouble, not to
mention countless indebted households”,
if interest rates returned to pre-financial
crisis levels (of around 5%). There’s a
sense that the BoE “cannot afford to
normalise” rates. Still, compared with
the pressure on Fed chairman Jay Powell,
Bailey has it easy.Ahead of the Fed’s meeting, hawkish
rhetoric from officials triggered “an
intense sell-off in the $23trn US treasury
bond market, the backbone of the global
financial system”, said the FT. The yield
on ten-year Treasuries (which moves inversely to price) hit 3% for
the first time in more than three years. That could have profound
effects on the US economy, “feeding” into mortgage rates and
borrowing costs, whatever Powell does. And Wall Street’s fears
have been compounded by the shock news that the US economy
shrank by 1.4% in the first quarter. There are real concerns about
the credibility of the Fed under Powell, said Mohamed A. El-Erian
on Bloomberg – because it has “failed so badly to predict inflation
in 2021 and so far in 2022”. The Fed “desperately needs to regain
control of the policy narrative if it is to have any chance to land
the economy softly”.Issue of the week: painful economic medicine
Fear on Wall Street: the US economy is shrinkingThe tech rout: what the experts think
● Brutal April
Boris Johnson has
reportedly joined “a
final push” to persuade
the Cambridge-based
chip designer Arm to
list in London. The
seller, SoftBank, has a
strong preference for
New York, the default
destination for Big
Tech listings. But
nowhere is safe these
days, said Laurence
Fletcher in the FT. High-growth tech stocks
have officially “entered a bear market” –
defined as a 20% or more fall from a
recent high – ending “one of the most
lucrative trades of recent years”. The
MSCI World Growth Index has fallen
22% since its November high, and “April
has been particularly brutal”. Among the
big casualties are Cathie Wood’s Ark
Innovation fund, a former “poster child”
of tech investment, which has lost 48%
this year. The most gung-ho UK investor,
Scottish Mortgage Trust, is down 34%.● Dot-bust redux?
“It’s now dawning on people that there’s
more to investing than handing out capital
like lollipops at a school fete to anyone
with an idea for flying taxis or carbon-free
hotdogs,” said Barry Norris of Argonaut
Capital. Indeed, there’s a feeling that we’ve
been here before, said David Brenchley inArk’s Cathie Wood: tech casualtyInflation bites
How are companies responding to
inflation, asked Schumpeter in The
Economist. Here are some bullet points:Everyone’s citing it From December to
March, almost 75% of firms in the S&P
500 mentioned rising prices in earnings
calls. “Such is the novelty” of inflation
that it “runs the risk of making such
turgid occasions almost riveting”.
Estimates are worsening Renault
initially predicted raw-material costs
would double this year; now it thinks
they’ll triple. Others talk of fivefold
hikes in the cost of sending containers
via Europe and Asia, and short ages of
everything from corn syrup to lithium.
Passing it on The risks of getting infla-
tion wrong are obvious – look at the
punishment Netflix took after hiking its
prices. But many big companies have
managed to push up prices “without
alienating their consumers”. This may
not last. Companies with the strongest
brands and market shares have most
flexibility. Coca-Cola’s use of price and
volume increases to deliver bumper
earnings was described by one analyst
as “a masterclass in pricing power”.
Premiumisation Some firms have made
hay by hiking the price of already costly
products. Pet owners can be bounteous;
Nespresso snobs rarely trade down.
Even when “shrinkflation” and quality
cutbacks are unavoidable, there’s an
opportunity to rebrand them as “cool,
thrifty” and “environmentally virtuous”.The US Fed is belatedly planning a series of bumper rate hikes. The risks of an accident are risingThe Times. The dot com
bubble, which began to
burst in 2000, took two
years to fully deflate.
Are we already in the
middle of a similar
crash? Some of the
biggest fallers – such as
tech-related lockdown
winners like Zoom,
Peloton and Moderna –
have lost 65-85% of
their value since their
most recent highs. Even the NYSE Fang+
Index, which tracks the biggest tech shares,
is down 27% this year, after recent steep
declines at Netflix and Amazon.● Re-balancing act
Of course, as Richard Hunter of
Interactive Investor points out, investors
ignore established tech giants at their peril.
Many have “dominant, and in some cases,
unassailable, positions in their market...
They are prime examples of what Warren
Buffett would describe as having a ‘moat’
around the business,” he told The Times.
Indeed, David Coombs of Rathbone
suggests this could be the chance to build
the tech portfolio “you have always
wanted”. More cautious voices urge
“rebalancing”. If you decide to stick with
tech, said Laith Khalaf of AJ Bell, give
yourself “a buffer against recession” with
some “old economy stocks” that pay
resilient dividends too.