Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Every three months, I write an Investment Outlook, analysing the main asset classes and geographical regions. More recently we have used the Outlook’s publication as the prompt for an online question and answer session on where the markets are heading. The next webcast will be aired next Wednesday and now is your chance to get your questions in.
Please note that I can’t give you personal investment advice as part of this online session but I’m more than happy to tackle anything that’s on your mind about different asset classes, regions, sectors or styles. So, don’t hold back. We’ll try to get through as many questions as we can - and as we’re bound to run out of time on the webcast, we’ll also set aside next week’s MoneyTalk Radio podcast to cover off whatever we don’t get to.
There’s never been a more interesting time in the markets, in my view. A profound shift is taking place in how governments and central banks see their role in managing the economy. The fiscal orthodoxy that’s prevailed for the past 40 years or so is changing. The era of small government, keeping out of the way of the economy and markets, is coming to a close, and a more interventionist approach is replacing it.
No-one knows how this will work out, but no-one should doubt the importance of the change and the scale of the bet that’s being placed.
The key event in all this, in my view, was the election of Joe Biden as President of the United States. He may come across as mild-mannered compared with his predecessor, but don’t think he isn’t making some bold and controversial decisions. The $1.9trn American Recovery Plan that he managed to push through Congress recently would be big enough on its own. But he has already shifted his attention to another $2trn infrastructure build over the next 10 years.
This is the most ambitious fiscal programme since the building of the interstate highways in the 1960s and Lyndon Johnson’s War on Poverty that accompanied it. Before that, you have to go back to Roosevelt’s New Deal for something comparable.
Biden is throwing down the gauntlet to China, America’s principal economic rival, by seeking to regain the US’s technological lead, reshoring the manufacturing that has shifted to Asia in recent decades, and putting in place the physical and digital infrastructure that will enable continued economic leadership.
It goes without saying that this will not come cheap. Paying for this bold plan will require higher borrowing and higher taxation. Already businesses are on notice that corporation tax will rise from 21% to 28%. And America is leading an international push to ensure that multi-national businesses pay their fair dues in the countries where they operate.
The gamble is that all of this will strengthen the US, and so the global, economy, not weaken it as Biden’s Republican rivals contend. The truth is we don’t yet know.
All of this has enormous consequences in the financial markets. Perhaps the biggest unknown is the impact that this level of spending will have on inflation. Spiralling prices have not been a big issue for decades and investors are having to remind themselves of both the impact of inflation and its causes.
It might seem obvious that printing money is inflationary. But the experience of Japan in recent years confirms that there is more to it than simply the amount of money in circulation. It also matters where that money goes - is it languishing as cash on corporate balance sheets or boosting the spending power of the lower income households that have the greatest propensity to consume the goods and services that drive physical inflation.
In the aftermath of the financial crisis, lots of money was printed. But it largely bolstered the balance sheets of over-stretched banks and fuelled a boom in the price of assets like shares and houses. Things might be very different this time around, as cheques are posted directly to poorer households and money is targeted at commodities-intensive infrastructure.
Rising bond yields (and falling bond prices) are one consequence of this change of direction. Booming share prices are another, with the S&P 500 now trading at more than five times its level in 2009 immediately after the financial crisis. Investors are looking through the pandemic to brighter times ahead and assuming that growth can be achieved without too much damaging inflation. We shall see.
So, as I say, a fascinating time to be involved in the financial markets. And a time in which many of us have plenty of unanswered questions. I’m really looking forward to hearing what’s on your minds and hopefully pointing you towards some answers next week.
We’ll take questions until midnight on Monday on the Investment Outlook page here. I look forward to hearing from you.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
Share this article