Mid-Year Investment Outlook 2019 | The World In Union?
In this issue of Investment Outlook we examine the relationship between the USA and China as they fight for global influence. We also discuss the future role of the dollar and look at how changing demographics and behavioural insights are having an increasing impact on Government policy and our lifestyles. And we ask - does it still make sense to own bonds?
10 min read
In our Outlook 2019 published in January, despite Brexit, trade wars and Donald Trump continuing to dominate headlines, we took the opportunity to reflect on longer-term changes and developments across the globe where we saw grounds for optimism. We looked at the implications of increasing lifespans, the success of vaccines in raising life expectancy, and improvements in quality of life across the globe.
In reference to this year’s biggest film, we thought by now we would be in ‘Endgame’ for several of these negative issues; however, we seem stuck in ‘Infinity War’. This is partly because the US-China disputes go far deeper than simple disagreements over tariffs and their effect on the trade balance – they are fighting for global influence in the 21st century. It is also partly because Trump used economic nationalism to win in 2016 and will surely try the trick again to win in 2020 – it is in his interest to keep the problems in the headlines, no doubt with occasional ‘great deals for the US’.
And in the UK, political chaos reigns. Will a new Prime Minister change this? Probably not. We continue to avoid most domestically focused UK stocks on the continuing uncertainties but remain upbeat on UK-based exporters.
One issue which has eased is pressure from rising US interest rates. Markets have moved from thinking there will be rate rises in the US this year to thinking there will be rate cuts. There is a suspicion they are keeping rates low to counteract the unpredictability of the President.
Turning to this mid-year edition of Outlook, we take a closer look at the US-China relationship and ask if it is destined to be stuck in a deep freeze. We also have a look at other influences and changes we are seeing in society, such as how behavioural insights are having an increasing impact in influencing Government policy. We look at the role of the dollar in the financial system, how longer life expectancies are influencing the once linear work-life journey, and finally we look at the history of bonds, and their continued importance and role in providing diversification and income for investors.
We hope you enjoy reading our thoughts.
Managing Director, Adam & Company
New Cold War?
A Nudge in the right direction
Classical economics and the models it uses assume that humans are rational and always know and act in their best interests. However, the models often break down when confronted with 7.7 billion humans acting on their gut instinct and who default to the status quo and inertia over change. Thaler took insights from psychology and marketing to develop the field of ‘behavioural economics’.
Why is this interesting? Governments have often struggled to implement policies to drive desired behaviours. Simply banning things, making them compulsory, or imposing punishment for doing wrong, rarely wins votes. So how do you get people to change to improve their lives or that of broader society? Thaler’s work has demonstrated that sometimes we just need a ‘nudge’ in the right direction, and these insights are being increasingly used by governments and others.
For example, we know we need to save more in retirement; however, there always seems to be something better to do with our money. The UK addressed this problem using a nudge – private sector workers are automatically enrolled in a pension savings account through their employer and you automatically start saving into this scheme, with your employer and the government contributing (as opposed to previously having to opt in).
It is not compulsory – you can opt out – but the policy takes advantage of people’s bias to inertia. It has been a huge success and the percentage of private sector workers saving in a pension account has risen from around 47% to over 76% in the past six years.*
A few dollars more
Could this change in coming years? Could another currency take over?
Every century or so, the world’s largest currency has changed – Portugal, Spain, France and Britain have all spent time as the dominant force, usually as empires have risen and fallen – and whilst the dollar dominates for now, rivals are chipping away.
Chief amongst these is China of course. Recent trade deals ensure deals are settled in their own currencies, and they purchase oil in Renmimbi rather than dollars. As China becomes the world’s largest economy in the next 20 years, many think non-dollar trade will soar. The problem for China at this stage is that their insistence on capital controls prevents the internationalisation of the Renmimbi, with a lack of regulatory transparency also a deterrent.
Finally, business opportunities will arise as companies will need to come up with new products and services. Banks will have to become more flexible around the traditional 65 year old age mortgage limit and be willing to lend into one’s 70s and 80s (already possible with Adam & Company), and more thought and advice will be needed on financial planning given, for example, the cap on pensions.
New savings and investment products will have to be devised, especially given that low interest rates look set to be with us for many years to come.
Age may well be an issue of mind over matter, but if you don’t plan for the future and adapt, it will matter.
No, Mr Bond
With trade wars and world domination on the agenda, are we really a World In Union?
About Adam investments
We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.View more from investments