Skip to main content
Search Close

Diary of a Fund Manager - Venn Diagrams

In this week’s Diary, infections, inflation, and the headwinds facing business at present. Also, the impact of ESG on just about everything.

Markets seem disinterested in the news flow, ending the week with equities and gold higher, bonds and the US dollar lower. Looking slightly deeper, the rest of the world outperformed the US, although the technology sector did better than all apart from Japan. Noise or signal is always a matter for debate, particularly as the holiday season winds down with a four-day week in the UK, reducing trading volumes. This week it is the turn of the US to start the week on Tuesday.

Two issues continue to dominate short-term sentiment: COVID and inflation. Global infection rates seem to have stabilised at approximately 660,000 per day, but concerns are rising about waning vaccine effectiveness. The impact of the Delta variant on US consumer sentiment is clear. Jab refuseniks seem unmoved by the evidence, including follow up studies. A third of French nurses including those who work in care homes and 40% of US marines have chosen not to vaccinate.

On the inflation front the news remains troubling with the German index rising by 3.4% over the last year; the fastest rate since 2008. With ten-year Bunds, German government bonds, yielding -0.36% investors seem prepared to lose a lot of the real value of their capital for reasons that I won’t try to guess. It’s impossible to tell whether they are very far sighted or incredibly short sighted.

As economic growth moderates, mentions of stagflation, where inflation is higher than growth, are on the rise. If temporary inflation becomes permanent, or just more persistent, whilst the hoped-for V-shaped recovery mutates into a low-level plateau, then this is a risk to the happy consensus that we are on track to get back to normal. Some months back I was warned by a reader, who was in business during the stagflationary 1970s, that price rises can be very sticky. With supply chains continuing to struggle because of shortages he may be right. A combination of not enough semiconductor chips, energy and qualified workers are likely to be with us for some time.

From a business perspective, and by association financial markets, these headwinds are increasing in intensity. To start with, costs, energy, other raw materials, components or wages are rising. Transportation costs need to be added to the mix, whether shipping or road. In Europe money supply growth is falling which is usually a sign of increasing caution. Central banks are pumping hard, but demand for bank credit isn’t easily controlled. August economic numbers imply that new orders are slowing. Well managed companies are finding ways to cope, but at an index level profit margins are under pressure. On the plus side cash rich companies are on the takeover and merger trail, while those with less imagination are simply buying back their own shares. Some are doing both.

Responsible Investment and Environment (E), Social (S), and Governance (G) issues have undoubtedly moved from the wings to centre stage.

The highlight of my week was being asked to contribute to a university course discussion about the impact of ESG on investment management. Responsible Investment and Environment (E), Social (S), and Governance (G) issues have undoubtedly moved from the wings to centre stage in recent years, altering the way in which companies behave, customers buy, and investors allocate their capital. There are many moving parts to this fascinating subject ranging from regulation to ratings agencies, carbon offsets to greenwashing, substance to image. Thinking back, variations on this theme have been with us for a long time. In the late 1960s the Club of Rome commissioned a report into the impact of finite resources on economic and population growth. When it was published in 1972 it caused quite a stir. Discussing this with someone who was involved, what came across was that protecting the environment and sustainability were not at that time considered political issues. The last fifty years have seen many changes, not least a doubling in the global population, a dramatic fall in the use of coal and the growing importance of lithium. Forecasting the future is tricky business.

This may be wishful thinking, but the environment, having become highly politicised in the intervening period is now becoming less so. The consensus has shifted to action, not just in one country, but around the world.

Compromises will have to be made which is never easy for those seeking perfection. China is now paying attention to the environment so a tick in the E box, but those expecting S and G progress could be waiting a long time. When you create an analytical framework, competing aims collide. Commentators, pressure groups and governments alike will struggle to decide what matters most or what is the least-worst option. You may have come across the concept of intersectionality, but if not do then look up the definition. Venn diagrams with a social overlay might be a good place to start.

Subscribe to the Diary of a Fund Manager

Get the inside view from Quilter Cheviot Investment Director, David Miller, in this award-winning weekly diary.

Subscribe to our email newsletter