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Could this be the end of the ‘high-inflation era’? If the Head of Research at Julius Baer, Christian Gattiker-Ericsson, is to be believed, the answer could be a tentative ‘yes’...
He was speaking at the latest bi-annual Market Outlook event, where representatives from Julius Baer offer up their insight into the financial health of the world economy.
Mr Gattiker-Ericsson (pictured top) was joined by the Head of Investment Management, Craig Allen.
Inflation rates continue to fall in the United States and the Eurozone, with some early indicators even showing the figures down at pre-crisis levels, according to Mr Gattiker-Ericsson.
He explained that the high-inflation era may be slowly coming to an end globally, with economic growth due to improve by 2025. However, pressures around the world, including notable elections and a declining Chinese housing market, could act as barriers to economic recovery.
China is currently experiencing a similar economic situation to that experienced in the West around the 2008 financial crash: A bubble in the housing market that has inflated property prices and led to increased debt.
When housing prices are high, households need to rethink their financing and there’s uncertainty whether Chinese policy makers are ready to step in – “This is the wild card,” said Mr Gattiker-Ericsson.
The US elections also bring uncertainty, with the betting odds currently not indicating a clear favourite. A win for President Biden would maintain a similar situation, but a sweep of the Presidency and the House of Congress for Donald Trump and the Republicans would make a difference as it would allow the party to pass laws that would likely alter the country’s approach to taxes, spending, regulation and more.
Mr Gattiker-Ericsson said the US election, while significant, is not something that will have much of a wider economic impact until the result is known.
“For now, we can essentially ignore the US election until 6 November, only then do these scenarios come into play. During an election year, equity volatility tends to increase around mid-year, opening up opportunities for investors.”
“The Federal Reserve is supportive of the economy, and they try not to rock the boat by offering a stable on monetary policy.”
Looking towards the UK, Mr Gattiker-Ericsson said he was impressed with the resilience of the economy and that, “a recession could be avoided by a narrow margin”.
The Bank of England’s decision to be hold interest rates has led to stability that has strengthened the British Pound.
The Bank normally is one of the first to alter rates, and may still be in the next few months, but this change in behaviour has helped to “keep things afloat for the UK economy”.
That isn’t to say that the effects of the cost of living aren’t still being felt by households, with the travel and leisure markets especially still having to hike prices and therefore becoming less attractive to consumers who are facing higher mortgage rates.
Mr Gattiker-Ericsson closed with an observation that “the economy is in a better state than you’d believe reading the media”.
Mergers and acquisitions are helping UK portfolio performance, something which Mr Allen touched on when addressing the audience.
He began with good news, that the majority of portfolios have recovered from the dual shocks of covid-19 and the invasion of Ukraine.
“Although portfolios are slightly behind in speed of recovery, they are recovering, with most portfolios being up 10% over the last six months,” he said.
Pictured: The majority of portfolios have recovered from the shocks of covid-19 and the outbreak of war in Ukraine.
“This is the first time in eight years that the UK portion of the portfolio is contributing materially, the UK remains one of the cheapest markets in the world, which is a good starting point for investors.”
Mergers and acquisitions (M&A) have suffered since Brexit, Mr Allen reported, which is down to uncertainty on what sort of market investors would be operating in. However, this has started to increase again with £20bn in M&A reported last year, representing 1% of the value of the FTSE.
“In the first four months of 2024, mergers and acquisitions have already topped £17bn. The FTSE is increasing almost daily which is being helped by these takeovers driving up share prices.”
Mr Allen also explored whether investors should be looking at big companies or small companies, noting that: “When you invest in smaller companies, you can sometimes see more rapid growth as their nature makes them more scalable. So, a smaller company can double its revenue and client base very quickly.
"This rate of growth, and therefore investment return, is unachievable for larger companies.”
He continued: “Since 2021, big companies have been winning because small companies were hampered by covid-19 restrictions, and recently by the higher interest rates that have impacted their ability to borrow money, and the cost of paying it back. Smaller companies do better when the economy does better.
“When smaller companies outperform, you get a huge win, that is why they are worth investing in.”
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