WEBVTT 1 00:00:10.640 --> 00:00:16.720 Hello and welcome to the December episode of  Monthly Market Insights. I'm Phil Attreed, Barclays 2 00:00:16.720 --> 00:00:21.680 Head of Wealth Specialists, and once again  I'm joined by Will Hobbs our Chief Investment   3 00:00:21.680 --> 00:00:26.800 Officer and we're going to be exploring what's  going on in the world of investing. So, Will,   4 00:00:26.800 --> 00:00:31.920 we've certainly seen more volatile markets this  month than investors have probably been used to   5 00:00:31.920 --> 00:00:39.760 now for some time; the Omicron variant alongside  an apparent change in tone from US central bankers   6 00:00:39.760 --> 00:00:44.640 in particular are clearly the main culprits  but what are the team's views at the moment? 7 00:00:45.760 --> 00:00:51.360 I think, Phil, the experts have long warned us  that this pandemic, the variant sting in this   8 00:00:51.360 --> 00:00:57.760 pandemic's tail could be a shock to markets at  some point and that certainly proved to be the   9 00:00:57.760 --> 00:01:03.600 case a little bit so far. Certainly the emergence  of the Omicron variant is part of that volatility   10 00:01:03.600 --> 00:01:08.800 story you're talking about. The data we have  on Omicron in terms of this is very young, it's   11 00:01:08.800 --> 00:01:14.400 very new and so we don't have many data points  which means that the story those data points are   12 00:01:14.400 --> 00:01:18.720 telling is volatile and shouldn't be listened  to too closely just yet. We just need more   13 00:01:18.720 --> 00:01:25.840 evidence basically but what you are in terms of  epidemiological gossip, if there is such a thing,   14 00:01:27.200 --> 00:01:34.720 most experts seem to be saying that in terms of  transmissibility, it does look like Omicron is   15 00:01:34.720 --> 00:01:39.840 at least as transmissible as Delta if not more so,  so this will continue to be a variant of concern.   16 00:01:41.200 --> 00:01:46.640 That means there is a danger that it will  out compete Delta essentially. But on the   17 00:01:49.840 --> 00:01:53.440 potentially more positive side than, like I say  it's incredibly tentative don't take this too   18 00:01:53.440 --> 00:01:57.760 strongly, the incoming information they have  at the moment is that it could be a little bit   19 00:01:57.760 --> 00:02:05.920 milder in terms of disease than severity versus  Delta. Vaccine efficacy information is coming   20 00:02:05.920 --> 00:02:10.400 over the next few days and weeks; we'll get more  information on this but again the inferences   21 00:02:10.400 --> 00:02:15.280 people are drawing from hospitalisation data,  the age cohorts of people being hospitalised,   22 00:02:15.840 --> 00:02:22.800 is suggesting that the vaccines are going to  provide some kind of protection. So the current   23 00:02:22.800 --> 00:02:28.640 view here is broadly speaking that there is  going to be a hit to certain types of activities,   24 00:02:30.080 --> 00:02:34.560 it will impede normalisation, but it won't  cancel it all together. And I think that's the   25 00:02:34.560 --> 00:02:41.040 important point. So you're looking at shifting  timings of certain things but not necessarily   26 00:02:41.040 --> 00:02:46.000 something yet that investors should get too het  up about. The central bank debate is interesting   27 00:02:46.000 --> 00:02:54.480 at the moment maybe just to me but there's some  interesting bits about it. The fact is that if   28 00:02:54.480 --> 00:02:59.440 you're thinking about how to measure the degree  of generosity from the central bankers, you've   29 00:02:59.440 --> 00:03:06.000 got to look at monetary policy in real terms i.e.  adjusting for inflation. Now if you look at this,   30 00:03:06.000 --> 00:03:12.880 viewed from this angle you can see what's  happened over the last couple of years is that   31 00:03:13.680 --> 00:03:20.400 monetary policy became very generous right  in the teeth of 2020 but actually since then   32 00:03:20.400 --> 00:03:25.360 the economy has recovered really briskly. You're  looking at the unemployment, everything, thanks to   33 00:03:25.360 --> 00:03:30.320 policymakers' support you've seen a really very  sharp recovery in activity and so on. However   34 00:03:33.280 --> 00:03:38.800 Basically because inflation and expected  inflation has been moving higher, faster   35 00:03:38.800 --> 00:03:44.800 than the market's expectation of normalising  interest rates and monetary policy, the actual   36 00:03:44.800 --> 00:03:48.560 monetary medicine we've been delivering  to the economy has been getting stronger,   37 00:03:48.560 --> 00:03:52.960 more, as the economy has been getting better.  So that is something that central bankers are   38 00:03:52.960 --> 00:03:58.000 looking at and you can expect that it won't  stay the case for long. We suspect that next   39 00:03:58.000 --> 00:04:03.360 year is going to be about normalising  those real interest rates a little bit. 40 00:04:04.640 --> 00:04:09.280 And of course markets and investors  and experts are having to get used to   41 00:04:09.280 --> 00:04:14.240 this new newsflow and obviously  the reaction that we've seen from   42 00:04:14.240 --> 00:04:19.920 investment markets and individual assets  is, whilst a little bit more volatile,   43 00:04:19.920 --> 00:04:26.480 there's not been of any of the kind of magnitude  that we saw last year at the peak of Covid.   44 00:04:26.480 --> 00:04:32.000 But it does seem like oil and cryptocurrencies  like Bitcoin are probably most notable just   45 00:04:32.000 --> 00:04:35.760 for the sheer violence of the movements  that we've seen in those in particular. 46 00:04:36.400 --> 00:04:41.840 Yes, you can link a supply story  here in a sense. I think, oil   47 00:04:43.200 --> 00:04:48.480 if you talk to the experts in this space, they  would argue that oil prices almost immediately   48 00:04:48.480 --> 00:04:58.080 or very swiftly incorporated the darker scenarios  associated with the Omicron variant. So I saw one   49 00:04:58.080 --> 00:05:04.160 analyst suggesting that if you look at front-end  pricing and inferred the barrels of oil of   50 00:05:04.160 --> 00:05:09.360 demand that you were taking out of that demand  inferred by that price move, then essentially   51 00:05:09.360 --> 00:05:14.640 you're assuming three months with plain free  skies. Now there are a lot of moving parts here,   52 00:05:14.640 --> 00:05:18.160 you can't really say it so precisely; I'm just  trying to give you an idea of the scale   53 00:05:18.160 --> 00:05:27.040 of the pullback. I think there are others though  pointing to other things to take into account.  54 00:05:27.040 --> 00:05:31.680 Now I'm speaking about: it's shale oil's budgeting season right now   55 00:05:32.560 --> 00:05:36.160 and what that tends to mean is that, if you  think about it, these guys are trying to make   56 00:05:36.160 --> 00:05:40.240 a profit like everybody and they're looking  at the oil price and saying, 'with my slightly   57 00:05:40.240 --> 00:05:45.680 higher costs of production should I think about  that particular geology or reopen that well' or   58 00:05:45.680 --> 00:05:50.800 so on. And so to a certain extent in OPEC, it  might be in their interest to have slightly   59 00:05:51.840 --> 00:05:57.600 lower or more volatile oil prices around this time  that's just one potential input. The point there   60 00:05:57.600 --> 00:06:02.480 I think is about investing in supply and this is  a key story with regards to all of commodities to   61 00:06:02.480 --> 00:06:08.400 be honest or many commodities, which is that  particularly the old economy, the less green   62 00:06:08.400 --> 00:06:16.960 ones, not only has that space provided very poor  returns over the last several years, decade even.   63 00:06:17.600 --> 00:06:22.880 And that has made attracting new investment quite  difficult but also our environmental objectives   64 00:06:22.880 --> 00:06:27.680 have made it quite difficult to attract new  investment into the space. Now the reality is   65 00:06:27.680 --> 00:06:32.720 that we know we're going to need some fossil fuels  and some of that stuff to get to that cleaner   66 00:06:33.440 --> 00:06:38.560 economy and we need to access it as cheaply  as possible. So how do you, that story   67 00:06:38.560 --> 00:06:42.560 probably still stays with regards to commodities  a little bit or at least the upside case.   68 00:06:44.640 --> 00:06:49.920 With regards to Bitcoin and again it's a kind of  supply story isn't it to a certain extent, which   69 00:06:49.920 --> 00:06:57.120 is: the attraction of Bitcoins and other coins  with a finite supply built into their algorithm,   70 00:06:58.080 --> 00:07:05.840 what's the attraction of that relative to money  which is under the control of central banks and   71 00:07:05.840 --> 00:07:10.160 various other political actors let's say or not  that central banks are political but you can see   72 00:07:10.160 --> 00:07:15.040 what I'm saying about, other kinds of authorities.  The big worry about or the big thing that Bitcoin   73 00:07:15.040 --> 00:07:20.720 was answering is: don't debase my money, don't  print lots more money and therefore devalue the   74 00:07:20.720 --> 00:07:25.520 value of something in my pocket and Bitcoin was  supposed to be in part an antidote to that. Now   75 00:07:25.520 --> 00:07:30.080 the point about what you're seeing, what I just  mentioned with regards to the outlook for real   76 00:07:30.080 --> 00:07:37.200 interest rates as some are speculating, that  if Bitcoin and other assets have prospered   77 00:07:37.200 --> 00:07:44.080 in a world where liquidity or capital was abundant  and cheap and real interest rates were falling,   78 00:07:44.080 --> 00:07:49.360 then what happens  if that world is reversed? That now you have   79 00:07:49.360 --> 00:07:54.160 central bankers talking a little bit about what  real interest rates need to head up and that   80 00:07:54.800 --> 00:07:59.360 capital needs to get a bit less cheap, how does  Bitcoin do in that? So there's lots of stuff   81 00:07:59.360 --> 00:08:04.720 going on in this; it's not easy to characterise  as one narrative but I think real interest rates   82 00:08:04.720 --> 00:08:10.320 is a really important story to look forward  for a lot of reasons and a lot of assets. 83 00:08:11.200 --> 00:08:19.840 Quite. Referencing that point about central banker  generosity in particular, next year should, as you   84 00:08:19.840 --> 00:08:26.960 say start to see central bankers maybe removing  that proverbial punch bowl a little bit more,   85 00:08:26.960 --> 00:08:33.680 so basically getting a little less generous.  Interest rates also there's certainly expectation   86 00:08:33.680 --> 00:08:38.560 that they should start to rise with quantitative  easing support being wound in a little,   87 00:08:39.280 --> 00:08:45.440 what should we expect by way of investment  market response to that kind of environment? 88 00:08:46.720 --> 00:08:52.480 I think it's a fair question, Phil, we don't want  to be too confident here. I think the one thing   89 00:08:52.480 --> 00:08:58.080 that people are making comparisons and pure  valuation between stock markets now and stock   90 00:08:58.080 --> 00:09:07.280 markets in the late 1990s before they went 'pop'  quite viciously with the tech bubble. Now yes,   91 00:09:07.280 --> 00:09:11.280 in absolute terms, that's true but I think the  point that everyone makes all along the while is   92 00:09:11.280 --> 00:09:16.960 that the relative story is very different. So  nominal interest or long-term interest rates,   93 00:09:16.960 --> 00:09:21.440 the discount rate, the risk-free rate of return,  whatever you want to call it, they were 6% in the   94 00:09:21.440 --> 00:09:27.916 late 1990s, there are there abouts. You look at  them now, the 10-year yield is less than 1.5%,   95 00:09:28.080 --> 00:09:33.600 so in real or nominal terms the comparison with  interest rates is entirely different. But I think   96 00:09:33.600 --> 00:09:40.480 our point would be that interest rates, stocks  have scope to absorb higher real interest rates,   97 00:09:40.480 --> 00:09:47.760 but what it might well do is change the leader  board. So which areas of the market prosper versus   98 00:09:47.760 --> 00:09:52.320 those which don't. There's some other points to  make as well and I think with regards to your   99 00:09:52.320 --> 00:09:56.880 outlook, it's not all of this stuff. You want  to be able to separate it out and say: 'Well   100 00:09:56.880 --> 00:10:01.920 this leads to this and that leads to that'. But  as we know they all interact with each other in   101 00:10:01.920 --> 00:10:08.853 complicated and sometimes unexpected ways - think  about your near-term and your long-term outlook as   102 00:10:10.240 --> 00:10:16.880 the broad edges of the stream and everything else  is possible in between and at the bottom, less   103 00:10:16.880 --> 00:10:24.800 positive area, you could say that maybe Omicron  is a blow that further or more permanently   104 00:10:24.800 --> 00:10:32.720 darkens our approach to saving and investing  or how we think about risk more generally   105 00:10:33.280 --> 00:10:37.520 and you get that story of pandemics past where  consumers and businesses are just a little bit   106 00:10:37.520 --> 00:10:41.360 more conservative for a longer time and that's  long term. It's deflationary even if we don't know   107 00:10:41.360 --> 00:10:48.960 what happens in the near term with inflation and  Omicron because of what it might do to important   108 00:10:48.960 --> 00:10:54.960 supply countries and so on. But on the upside as  we've said that there is this productivity story,   109 00:10:54.960 --> 00:10:59.840 which is particularly interesting at the  moment. Just look at the Healthcare angle   110 00:11:00.480 --> 00:11:08.640 and advances in how Healthcare is dispersed but  also treatments, vaccines, we really could be on   111 00:11:08.640 --> 00:11:14.480 the cusp from what you hear from some experts in  the space of breakthroughs that have the chance to   112 00:11:15.280 --> 00:11:21.520 transform the lives and productive potential of a  much larger slice of humanity and this again to me   113 00:11:21.520 --> 00:11:28.560 is part of a kind of growing evidence locker that  points to how productivity and innovation happens   114 00:11:28.560 --> 00:11:33.280 and happens on a sustainable basis. And this is  the big question of all economists and economic   115 00:11:33.280 --> 00:11:38.160 historians and anyone besides it's 'the' question  basically: how does productivity happen and why   116 00:11:38.160 --> 00:11:43.200 does it continue? And there's the pessimistic case  which you and I have discussed a lot which says   117 00:11:43.200 --> 00:11:48.480 that: look at the long sweep of human history, the  thousands of years of human history where nothing   118 00:11:48.480 --> 00:11:54.560 much happens, and then you get this little blip of  productivity which is the outlier they will argue.   119 00:11:54.560 --> 00:11:59.360 From the 18th century to now that's the outlier  and actually we're just about to return to those   120 00:11:59.360 --> 00:12:03.600 thousands of years of stagnation from  this fact and they point to this story.   121 00:12:04.240 --> 00:12:10.480 However, to me I think that misunderstands  a little bit, from my little perch,   122 00:12:11.520 --> 00:12:15.920 that might misunderstand or risk misunderstanding  the nature of why productivity happens. And I   123 00:12:15.920 --> 00:12:21.120 think the more attractive story to me anyway is  that actually the reason why you get millennia   124 00:12:21.120 --> 00:12:27.120 of stagnation followed by this pickup is that  knowledge, the type of knowledge that we needed   125 00:12:27.120 --> 00:12:31.520 to accrue, not just instincts, but knowledge that  explained the world and the universe around us,   126 00:12:32.160 --> 00:12:36.640 the causal power of this kind of wave of  knowledge, building wave, it required a couple of   127 00:12:36.640 --> 00:12:41.520 things: (A) Ability for us to be able to codify it  and write it down so that we can build on it and   128 00:12:41.520 --> 00:12:47.920 not go backwards but (B) it was about finding  the ability to use that knowledge profitably,   129 00:12:47.920 --> 00:12:53.840 how to do and it just took a while for that  causal power to gather. But once it has gathered,   130 00:12:54.400 --> 00:13:00.000 its power is almost infinite; its limits are not  knowable from our little standpoints right here.   131 00:13:00.000 --> 00:13:04.400 And I think the point that's really important  though is not just the codification of that   132 00:13:04.400 --> 00:13:08.480 knowledge but the thing that really changes and  sets it off in the 18th century and still today   133 00:13:09.040 --> 00:13:12.320 is the idea of error correction, our ability to   134 00:13:14.320 --> 00:13:19.600 be on the wrong path but for people to criticise  and to find a better way and to look to find a   135 00:13:19.600 --> 00:13:24.240 better path, or how to error correct. And that  is difficult, that required the scientific   136 00:13:24.240 --> 00:13:31.760 revolution to happen and that is a key part of  that build-up of that explanatory or propositional   137 00:13:31.760 --> 00:13:37.440 knowledge that has taken us far... sorry I'm  on the same rant again but it is important. 138 00:13:38.480 --> 00:13:44.320 Absolutely, Will, but moving away from history  to the present day, I guess playing devil's   139 00:13:44.320 --> 00:13:50.320 advocate as well: aren't we at risk here? So  the technological advances that we've seen in   140 00:13:50.880 --> 00:13:55.600 just this last decade or so particularly around  things like social media, have they not allowed us   141 00:13:55.600 --> 00:14:02.480 to retreat into little microcosms, little echo chambers  that essentially actually reduce the opportunity   142 00:14:03.200 --> 00:14:09.440 collectively to error correct as you say,  as we become more homogeneous in our views? 143 00:14:09.440 --> 00:14:17.600 Yes, Phil spot on. This crisis and not just  the policymaker response of asking us to go   144 00:14:17.600 --> 00:14:22.080 behind locked doors, but also the technological  response, we've been driven further into these   145 00:14:22.080 --> 00:14:28.400 kind of little citadels of agreement. I agree  entirely. And that is essentially the opposite,   146 00:14:28.400 --> 00:14:33.600 the antithesis to error correction to be able to  put us into the framework where we can actually   147 00:14:34.720 --> 00:14:38.800 see stuff. And I think the point about this is  that whatever answers we may have or think we   148 00:14:38.800 --> 00:14:46.000 have for the world around us as it stands, those  answers will need to evolve to fit, to your point,   149 00:14:46.000 --> 00:14:52.080 what happens the unknowable aspects of the future.  And history proves that the tradition of criticism   150 00:14:52.080 --> 00:14:57.520 is central to that ability to error correct. I'm  not talking about the anonymous bile that seems   151 00:14:57.520 --> 00:15:03.760 to prosper on much of social media but the idea  of evidence-based challenge, the kind that is   152 00:15:03.760 --> 00:15:10.667 not distinct from civilised debate. And in a sense  you can think about the liberal democratic model,   153 00:15:10.667 --> 00:15:19.600 is seen by some as the political version of  our error-correcting capability. The bet is   154 00:15:19.600 --> 00:15:25.040 essentially that democracy, it limits the damage,  or it assumes that the damage that can be done   155 00:15:25.040 --> 00:15:31.440 from an electorate, the ever-changing whims of an  electorate is significantly less than the damage   156 00:15:31.440 --> 00:15:37.360 that could be done by the whim of an individual unchecked  by the power, by the threat of deselection.   157 00:15:38.000 --> 00:15:42.320 And that's basically the bet. But if you  look in the year ahead, there are risks.   158 00:15:43.680 --> 00:15:51.440 Populations can go for options that are not  in their interests in a sense that's always   159 00:15:51.440 --> 00:15:59.760 the risk. But over time democracy has proved good  at that even; it weeds out the worst selections   160 00:15:59.760 --> 00:16:04.480 rather than permanently optimising for the best  ones. You can look out for the French elections   161 00:16:04.480 --> 00:16:11.200 on that obviously. But on the other side two of  2022's big threats are with regard the territorial   162 00:16:11.200 --> 00:16:16.000 mores of a different governance model: the  straits of Taiwan and the Ukrainian border   163 00:16:16.000 --> 00:16:27.440 or two areas where we hope that self-interest and  logic would prevail. But there are risks there. 164 00:16:29.520 --> 00:16:31.760 I guess those are certainly some of the risks,   165 00:16:32.320 --> 00:16:39.600 aside from what we've already mentioned earlier  on, that we may well face ahead in 2022. But what   166 00:16:39.600 --> 00:16:45.520 about some of the positives that we might  also benefit from as we look to next year? 167 00:16:46.240 --> 00:16:54.240 Well from the economic standpoint, there's  plenty of positive dry powder on the side-lines.   168 00:16:55.680 --> 00:17:00.400 Still businesses are running very low stockrooms  so there's a huge inventory build that is   169 00:17:01.360 --> 00:17:08.160 set to help the economy at some point  next year. There is also the prospect of   170 00:17:08.160 --> 00:17:12.400 those excess savings that many people have  talked about. Now in various countries, they're   171 00:17:12.400 --> 00:17:16.480 skewed differently in terms of who actually  has these excess savings, but that's again   172 00:17:17.040 --> 00:17:23.600 something that could be quite forceful in pushing  the economy forward over the coming year. And also   173 00:17:23.600 --> 00:17:31.520 the reality over the course of next year, we  will see the oral treatments for Covid ramp up   174 00:17:31.520 --> 00:17:36.480 and that could be a significant, hopefully final  blow for this pandemic. I'm not saying that we're   175 00:17:36.480 --> 00:17:42.400 not going to live with the coronavirus for some  time, this latest coronavirus, for some time. But   176 00:17:42.960 --> 00:17:47.440 that we could start to see a more meaningful  return to normality as those Covid pills   177 00:17:47.440 --> 00:17:52.080 start to spread around the world. Those are all  positive things and the other side I would say is:   178 00:17:54.880 --> 00:18:04.400 take some pride where you can on the fact that  accumulated scientific knowledge when met with   179 00:18:04.400 --> 00:18:11.200 the right incentives led us to these incredible  healthcare solutions of the last two years,   180 00:18:11.200 --> 00:18:16.320 which have taken us into a completely different  place to where we would have been if the context   181 00:18:16.320 --> 00:18:23.600 was the same healthcare context that you had in  the 19th or 18th or any other century. That does   182 00:18:23.600 --> 00:18:29.920 show, it illustrates some of the technological  capabilities and I would say that we are entering   183 00:18:29.920 --> 00:18:35.680 the fourth industrial revolution. I think that's  the point and that for investors tends to be a   184 00:18:35.680 --> 00:18:40.400 pretty good time to be invested, even if the  wider society can be a little bit turbulent. 185 00:18:41.280 --> 00:18:48.000 Absolutely, healthcare innovation being one of  those investing for innovation themes that we   186 00:18:48.000 --> 00:18:53.680 spoke of over the summer months and  wrote numerous articles as well. Will,   187 00:18:53.680 --> 00:18:59.040 as we head into the end of this year,  thank you again for your insights,   188 00:18:59.040 --> 00:19:03.520 and thank you also to our viewers and listeners  for joining us. If you would like to hear   189 00:19:03.520 --> 00:19:10.800 more from us over the course of the next month  or so ahead of the next of these episodes,   190 00:19:10.800 --> 00:19:17.680 please do seek out our weekly podcast Word on  the Street, where we share our latest views   191 00:19:17.680 --> 00:19:23.840 on developments. Otherwise, Will and I look  forward to being back with you in early 2022.