Andrew Hunt Commentary

Investment Insights by our experts and thought leaders

Dire Straits? Or a New Era

Last month’s ever austere Bundesbank Monthly Report contained an essay on Pension Reform in Germany. The article is quite long but suggests that the German Pension system only has two long term options to maintain its solvency: either accept that the purchasing power of pensioners is set to fall; or the retirement age will need to rise to 69 or higher by the year 2070. Either pensioners will have to accept less in the future in real terms or work longer – the choice seems stark.

“Stagflation-lite” coupled with a severe geopolitical crisis was much worse for equities than we expected, but most of the bad news is priced in, so the prospect for global economies and equities in aggregate should improve. While we expect global GDP to moderately underperform consensus, it should skirt recession and positively surprise equity markets, which increasingly have priced in recessionary conditions.

A More Uncertain Future than the Hawks Realize

Since the Pandemic first unfolded, it has generally paid to invest and act according to what the Federal Reserve Chairman said was going to happen, rather than what did in fact happen. The obvious example being last year, when the Fed told markets not to worry about inflation even though the central bank clearly should have been worried about rising inflation rates…..

What Next for Bonds?

The rise that has occurred within longer term bond yields over recent weeks has certainly been “enthusiastic”, and we suspect that many view the move as being no more than a belated / overdue reaction to the higher rates of inflation within the global system.

The GIC expects the global economy to continue struggling in a form of “stagflation-lite” and sees a relatively flat performance for global equities for the next three to six months (although quite positive on Pacific equities), with moderate weakness for global bonds.

How to Pay for the War: Politics & Central Banks

The economic costs of the current conflict in Ukraine may pale into insignificance in comparison to the human suffering, but they are not irrelevant to markets. The bottom line is of course that wars make society poorer, as does conflict in general, natural disasters, or catastrophic errors.

Russia Ukraine Conflict

Following the Russian invasion of Ukraine, there has been considerable media coverage and interest about the implications this has on New Zealand investments. This invasion has seen devasting humanitarian effects. Our thoughts are with the people of Ukraine and those who have had family and friends affected by this crisis.

Russia - Ukraine

The Western World today faces a public sector burden that bears a troubling resemblance to the immediate Post-war period in the late 1940s and 1950s; a private sector debt burden that bears comparison to the late 1990s / early 2000s; and an inflation problem that is beginning to look like the 1970s. Now, we would add to this list a “Cold War” situation that looks like the early 1980s (i.e. Afghanistan and other Proxy Wars between superpowers).

America Sneezes... Asia Stumbles

The Federal Reserve may have been caught by surprise by the persistence of inflation in the USA over recent months but we suspect that many investors in the Emerging Markets are about to experience a similarly unpleasant surprise of their own.

Why December 2021 May Have Made History - The Great Divergence Begins

While last month witnessed only its usual quota of central bank policy meetings, we suspect that it will ultimately go down in history as representing the beginning of what we suspect may become the Great Divergence within central banking. Having spent a generation moving in similar directions in an overt effort to suppress currency volatility, it now appears that the central banks within the major Economic Blocs are beginning to move in different directions. We believe that this development has the potential to dramatically alter the investment universe.

Global Investment Committee's 2022 Outlook: Positive for risk assets

According to our Global Investment Committee, which concentrates on the intermediate term-view regarding developed markets for pension funds and other long-term investors, 2022 looks to be a challenging, but positive year for risk assets. We believe that the G-3 central banks will become more hawkish, and such pivots can often cause potholes and at the very least headwinds, but we trust that policymakers can traverse their new course successfully overall.

The global economy should match the consensus for strong growth, thanks to vaccinations, continued fiscal stimulus, acceptable global geopolitical conditions, and continued low interest rates despite increasingly hawkish central banks. Such, via increased corporate profits, should allow equity markets to perform very well ahead, with impressive returns in each region, particularly in Japan.

The Reluctant Fed

Although the late 1980s’ “Lawson Boom” in the UK was an interesting first real-time introduction to a credit boom, the author’s first authentic experience of the “madness” that can accompany a credit boom was centred on Japan in 1988 and 1989.

Bygones are Bygones – Don’t Look Back in Anger

Although it is often overlooked (perhaps because it is yet another rather inconvenient truth), the simple fact is that the COVID-19 Pandemic and the various Supply Chain Disruptions that have followed it has made most of us poorer.

Evergrande – China’s Mieno Moment, or it’s Bear Stearns?

During the late 1980s, at the height of the Bubble Economy, and at a time during which seemingly everyone wanted to emulate the Japanese economic model, we were lucky enough to have high level access to the Bank of Japan.

Out of the six scenarios presented, a narrow majority of our committee agreed again on a positive scenario in which the global economy matches the market consensus for solid growth, while equities continue to rally.

Out of the six scenarios presented, a solid majority of our committee agreed again on a positive scenario, in which the global economy matches the market consensus for very strong growth, while equities continue to rally.

It’s Different This Time: Inflation Versus Deflation, Credit versus Money

It may not be quite as profound as the eternal “chicken and the egg question” but nevertheless we suspect that deep in the bowels of some academic institutions, aging economists are still debating which came first, money or credit? Did the flow of money into the banks allow them to make loans, or did the loans create the money?

Global Investment Committee Outlook: Continue risk-positive

A large majority of our members agreed on a positive scenario in which the global economy mildly outperforms market consensus, while equities continue to rally.

Can the Rest of the World Afford Higher US Inflation?

There is a relatively simple narrative dominating markets at present, namely that the US economic recovery will accelerate as the latest stimulus measures are enacted, the output gap will close (if you believe it is negative – or it will widen further if you think as we do that it is already positive,) and US inflation will pick up by some amount.

Japan equities poised for further gains along with a turnaround for value

In February 2021, Japan’s Nikkei Stock Average reached JPY 30,000 for the first time in over three decades. We believe that equities will keep rising, and that amid this shift in the broader market Japanese value stocks are on the cusp of a long-awaited turnaround.

Credit spreads explained: The devil is in the details

For corporate bond investors one of the most important points of discussion is spreads. Spreads are the industry term for the risk premium an investor aims to earn in the corporate bond market. It is the difference between the yield a bond is promising and the risk-free rate. If spreads are narrowing it is positive for investors as the price of the corporate bond will increase; likewise, a widening leads to a lower bond price.

Meditation for investment professionals

The investment industry is constantly searching for ways to improve its decision-making processes. Some firms increase their research teams while others move into quantitative fields such as machine learning. Amid this constant search, we focus on an alternative way to enhance the quality of our decisions; mindfulness can make the difference between a rushed, emotional decision and a thoughtful, rational conclusion.

Deficits Don’t Matter – At Least Until They Do……

During the 1980s, the favourite worry for most economists – or Cassandras - was always deficits, be they fiscal or current account deficits (and the USA of course had both throughout the 1980s).

Global Strategy Thoughts for 2021

US capitalism was built on large societal divisions, but sometimes such becomes intolerable and the majority of the population revolts. In this case, the virus accentuated the income divide and engendered even greater angst. However, during the past four years, the majority fought back in different ways and ended up fighting each other, while the wealthy prospered more than ever, with high-skill workers reaping gains while lower-skill workers struggled and were often displaced, especially after the virus.