Diary of a Fund Manager - Growing Pains - 10.5.2021

In this week’s Diary, snippets of information from many places illustrating that reopening the world will be easier said than done. Supply chain problems are the new limit to growth. Also, an update from India and why what is happening there matters to all of us.
A little bit of bad news proved helpful. Equities, bonds and gold all ended the week higher with the dollar down. The bad news is good news event was not really that bad. Last week it was announced that 266,000 new jobs were created in the US last month which was well below expectations of over one million. As a result, fears of higher interest rates were put to one side to the benefit of all asset classes. Why the forecasters were so wrong is a matter of debate with no clear explanation emerging, but nonetheless the list of possibilities is informative; supply chain shortages are unsettling companies that might otherwise be recruiting, the return to the office is taking longer than expected with knock on effects or pandemic benefits are making low paid jobs unappealing. Some combination most likely.
Elsewhere, voters had their say in the UK, including Scotland and Spain. The pandemic may have changed opinions, but clarity remains in short supply. Post-Brexit fishing rights continue to cause trouble, this time around Jersey. Colleagues on the Reserve List put their affairs in order, but for now have been stood down. Company results continued to attract attention. Pfizer reported a 42% increase in sales, but enthusiasm was tempered by pressure on profitability and concern about intellectual property rights. Janet Yellen, former Fed Chair and now US Treasury Secretary made a thoughtful speech about the eventual need for higher interest rates. She then reversed course a few days later. Markets reacted to both of her statements before settling down showing once again that US monetary and fiscal credibility has become the gold standard of the 21st century.
From pessimism to optimism, it has been an extraordinary 12 months. Lockdowns, restrictions and vaccines have dominated the headlines. Investors have travelled this rocky road as rationally as possible and without a collective loss of nerve. Without wishing to appear harsh about the recent past, now for the hard part. The challenges of re-opening are proving as tough as the lockdown and because we have more time to think, the harder it is to implement. Shortages are appearing in many places as demand exceeds supply; raw materials from copper to timber, food staples, computer chips and jobs. Bottlenecks are a potential impediment to growth and a potential source of inflation. Quite how long it takes a new equilibrium to establish itself will vary from sector to sector. Mines take years to develop, increasing freight capacity is much more then flicking an on/off switch and so even optimistic farmers are wary about over planting. The shortage of computer chips is a slightly different matter. Here the problem is the rapid increase in demand as the ‘internet of things’ continues to expand. It is not that the major manufacturers, like TSMC or Samsung, have been delinquent in planning for the future. Both expect to spend over $20 billion this year on increasing capacity. For now, however, there are not enough chips to go around which is why car production lines are being temporarily closed and showrooms are emptier than they might otherwise have been. Inventories built up by accident last year are being run down at a rapid rate.
Bad news from India has been unrelenting in recent weeks. The numbers, whether infections or fatalities, are huge and the fact that the problems are so visible, whether queues outside hospitals or cremations, makes the current situation appear even worse. Notes from a business trip that I made in December 2019 describe a different time undoubtably, but a different world? Beyond the TV pictures, feedback from those I met then tells a more detailed and hopeful story. Daily vaccination rates remain in the millions, sufficient to protect a country the size of Ireland every couple of days and oxygen supply is now being ramped up at a rapid rate. Mistakes have been made and the logistical challenges are enormous, but India is far from a failed state. I have written before that investment markets may be amoral, but they do tell a story. Investors seem prepared to look through the current problems to a brighter future. Given that India has manufactured one in five vaccines so far administered worldwide and is a major supplier for personal protective equipment (PPE), let’s hope so. The implications for all as this disease progresses are clear and not just for those living in India.
Having torn the world apart over the last year, we are now putting it back together. Growing pains are likely and investors will need to remain on their toes.

Written by

David Miller
Investment Director

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