SIMON BROWN: I’m chatting with Hywel George, director of investments at Old Mutual Investment Group. Hywel, I appreciate the time today. Let’s first kick off with 2022 which, in many ways [as you said] in a note you put out recently, is really mirroring the 1970s. We’ve got high oil [prices], we’ve got inflation. We’ve had initially loose monetary policy, which of course then ends up in rising rates.
HYWEL GEORGE: Yes, it it’s very concerning, Simon, I must say. The comparison is a little too apt for my liking. The 1970s were a very difficult time and it’s been a period which many people, to be honest, have either forgotten or weren’t around for.
The Federal Reserve in the United States made a number of mistakes in the 1970s. They kept interest rates low for way too long, which has happened again this time around and inflation ran out of control, and it took Paul Volker in the late 1970s, early 1980s, to raise rates to around 18% to get on top of inflation. I hope we don’t see the same as that again. But it has the hallmarks of it, I’m afraid.
SIMON BROWN: It has the hallmarks of it. And that then raises the next question: one of the other hallmarks is sort of places to invest in the seventies. Gold was the obvious one. [US President Richard] Nixon had just come off the gold standard, so there were some slightly different nuances there. Some Reits, and everyone’s currently liking inflation-linked bonds.
HYWEL GEORGE: Yes, in those days, and before gold was a very natural asset class for people and large institutions to hold as part of their portfolio. That’s gone by the by. In the very low era of inflation we’ve had for the last 40 years people haven’t really needed gold in that sense.
But gold is coming back and I suspect will be a part of people’s portfolios as we enter this, what is going to be a higher inflation era for the next decade, I suspect.
And then real assets these days are important. So anything like infrastructure or renewables tends to be index-linked. If we can get a way to get retail investors as well as large institutions into those assets by, let’s say, tokenising them using blockchain, I think that could be a really interesting asset class for people to invest in, in an era of higher inflation.
SIMON BROWN: Yes, blockchain. I haven’t got time for that rabbit hole, but I’m going to store that away in my mind because there’s another trend that’s coming through at the moment, and that’s a geopolitical one. That is the rise of China.
HYWEL GEORGE: Yes. This is the second really big shift, I think, for this decade. A shift to inflation and the shift to Chinese dominance, and China have shown how dominant they are in the technological area. They’ve shown how dominant they are in space.
The Chinese put a landing craft on the dark side of the moon four years ago. We didn’t even know what was on the dark side of the moon because you never see it, and the Chinese managed to land on it. They’re doing that because they want to mine for minerals to build space stations in space. They’ve said going to build the first space hotel in space in 2025.
And militarily, as well, they’re flexing their muscles as well as, of course, economically through the Belt and Road Initiative, which is an $8 trillion infrastructure initiative stretching all the way from China through the Middle East and into Europe. So they really are heading our way and we need to be ready for them.
SIMON BROWN: We need to be ready for them, but also we need to maybe get some of that in our investment portfolios. That is perhaps the challenge. Yes, there’s Tencent, there’s the JD group, there’s Alibaba, there’s BITs. But it’s not an easy place to invest, particularly for private clients.
HYWEL GEORGE: It’s not. The way to do it, the way we see it, is to invest in those companies which are based outside of China but can benefit from that Chinese growth and dominance because, once you invest in China, you’re investing (a) in a communist state, which is what it is, and (b) in governance standards which you can’t lay a great store by. So invest in companies which benefit from Chinese growth but aren’t based there.
And the great thing about China is that they tell you exactly what they’re going to do. You just need to read their five-year plan every year and they will tell you where they’re investing – be it quantum computing or renewables – and you can invest alongside them.
SIMON BROWN: That’s a good point. They really do spell it out. And of course, we’ve got the big conference coming up in October, so we’ll get lots of insight into that.
If we pull all this together – and this time it’s different because history repeats itself – what we do have is for investors after 15-odd years of easy, cheap money, quantitative easing, go-go high-value stocks, in the next decade we’ve got to adjust our thinking to the previous.
HYWEL GEORGE: It’s going to be lower real returns in a higher inflation environment. And the Fed pumping in, what was it, $8 trillion in money printing into the economy of the last decade, (a) it has produced inflation and (b) it has produced very strong markets, and that’s something which is going to change for the next few years at least. We’re going to have to get used to lower returns out here.
SIMON BROWN: Yes, but we are not going to get another $80 trillion unless something goes horribly wrong. Hopefully we don’t.
Hywel George, director of investments at Old Mutual Investment Group, I appreciate the insights.
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