Shutting out the short term

We’re in a complex and challenging world at the moment. There’s no shortage of negative news – and the macroeconomic headlines are particularly grim. As the global economy slows and inflation continues to surge, policymakers face a delicate balancing act. For investors, the challenge is to find the long-term signals amid the short-term noise.

Bad economic news has been coming thick and fast. The US is already in recession, Germany is looking precarious, and although the UK is stumbling on with modest growth at the moment, we’re clearly facing a global economic slowdown. At the same time, consumer price indices are at multi-decade highs – exacerbating the cost-of-living crisis. This puts policymakers in a bind, as they realise that they have to balance growth against inflation.

Stocks and bonds still did well

But despite all the macroeconomic gloom, both bonds and stocks delivered a significant bounce in July. Evidently, market participants are starting to look beyond the current cycle of rate hikes. Instead, they’re factoring in an end to monetary tightening and even the return of rate cuts – despite the fact that inflation is yet to peak.

So does that mean we’re out of the woods? No – of course not! But it does show how futile it is to place too much importance on short-term developments in either the stock market or the wider world. So much of what we see is ‘noise’ that long-term investors would be best advised to ignore.

How then do we as investors balance short-term risks with our goals of securing long-term returns and protecting our investments from inflation? Well, the key point here is that we shouldn’t extrapolate the short term into the long term – whether that’s short-term economic woes or short-term bursts of market optimism.


Spotlight on travel

Now that we’ve entered the holiday season, the travel industry provides a perfect example of this. Over the summer so far, we’ve seen a surge in people setting off on holiday. This has pushed up the prices of flights, hotels and holiday packages. The main factor in this is pent-up demand. Covid restrictions meant that lots of us had our holidays cancelled in 2021, so we’ve been especially keen to get away this year.

Travel businesses know this – which is why they haven’t responded to the surge by adding additional capacity or otherwise investing. These businesses understand full well that they shouldn’t see a short-term spike as pointing to longer-term trends. People will soon have got the travel bug out of their systems and will have to contend with the cost-of-living crisis. So travel companies aren’t hiring more staff or putting on more flights.

And that’s where we are as stock-market investors. We can see what’s happening in the short term, but the longer term is clouded by the fog of inflation. Like the travel companies, we’re remaining relatively cautious. Rather than get caught up in the short-term ups or downs, we’re staying focused on the long-term picture – although we will look to benefit from any pullbacks along the way.

Investment view: the tussle for the top

On the UK political front, July’s big news was, of course, the resignation of Boris Johnson. The field of candidates to succeed him as leader of the Conservative Party – and thus as the UK’s next prime minister – has been quickly whittled down to just two: Liz Truss and Rishi Sunak.

As the Foreign Secretary takes on the former Chancellor of the Exchequer for the top job, media attention has been focused on their different approaches to taxation. Essentially, Truss wants to cut taxes right away while Sunak aims to tackle inflation first and bring taxes down from 2024.

The truth is that these differences are trivial – and are dwarfed by the challenges that the next prime minister will have to face. And the greatest challenge of all is that whoever wins won’t be able to fix these problems. There’s simply no quick way out of economic difficulties that have been decades in the making.

The UK’s debt-to-GDP ratio is about to breach 100% – which puts severe constraints on what policymakers can do. The tax base cannot take any more pressure, the government is already heavily indebted, and inflation is through the roof.


Some of this, clearly, is the fault of current government – including the contenders for Number 10. Rishi Sunak, for example, knows his economics. Yet despite this, he has implemented policies that were economically disadvantageous – such as energy price caps – because they were politically popular.

Ultimately, the only way to cut taxes over the longer term is to cut spending. Unless the government does that, tax cuts just mean more inflation. But too many public servants need pay rises to allow spending to come down – and  government spending now accounts for 50% of the economy. That requirement for bigger pay packets is in turn a result of inflation – which was ultimately caused by the government spending money that wasn’t covered by the tax take.

Nevertheless, most voters want both tax cuts and pay rises. That means we’re trapped in a vicious cycle. It might be said – albeit with some cynicism ­– that Truss and Sunak are jostling for the captaincy of the Titanic.

The good news is that we, as investors, have the capacity to avoid the broad risks inherent in the UK economy by being globally diversified. Ultimately, politicians deliver the will of the people, and in this sense it doesn’t matter who the figurehead is. No real solutions can be proposed until the electorate realises that major government interventions come at a painful price.

Phil Smeaton
Chief Investment Officer

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Sanlam. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.

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