Published: 25 January 2023
Location: London, UK
"Government debt, hospital waiting lists, rail strikes, healthworkers on strike, slowing economy, inflation, public demonstrations, threat of energy rationing....."
Above, of course, I refer to France!
The news we read in the UK rightly exposes the UK’s problems, but other economy’s ills are often overlooked. Looking elsewhere in Europe, Germany, for example, has serious concerns over declining exports and a catastrophic dependence on Russian energy. Recession, therefore, seems inevitable.
News around the world reveals the UK’s problems are not unique but arguably more numerous. Our central bank, like many others, was too slow to raise rates and even now the rates are too low. The Bank of England doesn’t appear independent when rates are being kept too low to stamp out inflation, which we are told is its prime directive.
Too many political decisions have been made - thank goodness our PM is currently standing firm over strikes. He has inherited an economy which has lived above its means for 20 years. Spend and borrow has prevailed no matter the alignment of governments red, blue and coalition alike. A trade gap has been a constant feature which has now reached unprecedented levels. If we include off balance sheet items, unfunded public sector pensions, PPI, student loans etc., then government debt is close to £4 trillion. This number is hard to comprehend, but I tend to use the following to explain - a million seconds takes 11 days to expire. One trillion seconds would take thirty two thousand years. Young voters will be the ones to inherit this debt, but there are no signs any would vote for a government willing to combat it.
Our financial ills don’t stop there. We have had a fiscal deficit for over 20 year ergo the total debt is growing. Currency movements in the short term are impossible to forecast, they are caused by sentiment rather than fundamentals. Sterling has rallied since the Truss crash but in the medium term I am not optimistic in light of the above. Trade deals, of which we were optimistic, have faltered and the world is becoming more protectionist. We expect sterling to come under pressure.
Oh, and I have forgotten to mention that there is a bloody war being waged in Eastern Europe with no end in sight despite western propaganda optimistically foretelling the demise of Putin. Similarly, don’t be fooled by Xi Jinping’s inscrutable countenance - he is definitely not sweetness and light. He has presided over an atrocious record of human rights. Xi will be watching the West’s support of Zelensky in the Ukraine. If he sees the West’s ardour falter, would he invade Taiwan? It would certainly avert his populace's attention from their Covid crisis.
A whistle stop tour of the world and an appraisal of the landscape is vital in establishing investment opportunities and risks. The world is experiencing increasing protectionism, energy shortages, lingering inflation and conflict. Political stability and economic strength will be the most important factors.
The USA was slow to combat inflation and still might need to impose further rate rises. There is a chance the American economy could experience a recession. America nevertheless looks less gloomy than elsewhere. Some economic growth is forecast albeit just 1%, but the USA has a record of surprising on the upside. There appears to be no workforce shortage of the type bedeviling other economies. The USA is also more insulated from energy shortages and protectionism. America remains the most entrepreneurial economy with a huge array of great businesses.
I believe most UK-based investors are still underweight in America. Currently there is much uncertainty and it seems sensible to seek the large successful companies in the safest economy. Blue Whale, for the time being will concentrate on investing in the USA and North America more generally. Further, I am pleased to see Stephen and his team have maintained their conviction in quality businesses - these tend to prevail in an uncertain environment.
A final note. Stock markets are being held back pending potential further interest rate rises. In the short term markets will remain volatile but if history repeats itself, when the fear of inflation and need for a rise in interest rates recedes, markets could soar. There will be false dawns but patience should be rewarded. Please note that the information provided in this email is not to be construed as advice and any views we express on holdings or other assets do not constitute investment recommendations and must not be viewed as such. If you are unsure as to the suitability of an investment for your circumstances, please seek independent financial advice. Investments can go down in value as well as up so you may get back less than you invested. Your capital is at risk. Past performance is not a guide to future performance.
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