“Clear and Present Danger”. Film lovers will recognise this as the title of the 1994 thriller starring Harrison Ford. But no, this week’s note is not a movie review; this a quote lifted from the International Monetary Fund’s (IMF) World Economic Outlook (WEO) report when they discussed inflation.
The WEO predicts inflation for advanced economies will now be 5.7% in 2022, before falling to 2.5% in 2023. The threat of higher inflation is a “clear and present danger for many countries” according to their report. Global growth was downgraded from 4.4% to 3.6%, with every member of the G7 group of nations likely to experience slower growth than predicted three months ago. The WEO highlighted the Russian invasion of Ukraine as the key driver to their downgrades.
Staying with the movie theme, Netflix made the headlines this week when it released its latest set of results. Their subscriber numbers fell by 200,000, and the company predicted there will be further declines over the next quarter. The news sent the share price tumbling 35%, with analysts predicting we may have now seen a peak in Netflix subscribers. The competitive landscape has intensified, while cost pressures are impacting consumers.
Bond markets came under pressure on Thursday following comments from US Fed Chair Powell regarding the potential for a 50bps (0.5%) interest rate hike at their next meeting at the start of May. The US 10-yr Treasury yield rose to nearly 3%, while in the UK the yield on the 10-yr Gilt breached 2%. Rising bond yields put pressure on the US Technology sector, with the NASDAQ equity index falling over 2% on Thursday.
Supply shortages continue to plague the car industry, with European new car sales dropping over 20% year-on-year. The dramatic fall in sales has been driven by a lack of semi-conductors, high inflation and the Russian invasion of Ukraine.
Research from Deutsche Bank showed that the US consumer continues to be in a strong position, despite rising inflation. US households cash levels now exceed their debt levels for the first time in 30 years. Despite a more uncertain economic outlook, it can be argued that the consumer is in a very strong position to be able to weather tougher conditions.
The continued volatility in both bond and equity markets can be uncomfortable, but as we have often highlighted, it can also create opportunities, particularly for long-term investors. It is also important to be willing to challenge consensus and consider a range of different scenarios. Netflix shares falling 35% is a timely reminder of what can happen when consensus is wrong. The consensus in bond markets is now that inflation is persistent, and the US Fed will have to aggressively raise interest rates over the next 12 months. While this could be true, there is an opportunity to buy US government bonds with a yield of circa 3%, while also accessing an asset that typically performs well in recessionary environments.
Andy Triggs | Head of Investments, Raymond James, Barbican
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.