“It benefited from sustained falls in inflation, interest rates and risk premia,” he says. “Geopolitical tensions eased and supply-side reforms accompanied waves of deregulation, the end of capital controls, deeper capital markets and stronger world trade growth. A new era of globalisation drove profit shares of GDP to record highs. Independent central banks and forward guidance contributed to longer and less volatile economic cycles.”
But what comes now, Oppenheimer says, is a “postmodern cycle” that looks very different.
Where interest rates have fallen for 30 years, they are now set to rise, albeit from emergency levels. This will be compounded by the switch from quantitative easing to quantitative tightening.
A world of regionalisation
Where deregulation has been the watchword of governments for generations, this new cycle is likely to lead to governments becoming bigger, more interventionist and probably higher taxing.
Where the modern cycle was characterised by globalisation made possible by a lack of geopolitical tensions, Oppenheimer sees a world of regionalisation, where fraught geopolitics and security concerns lead to on-shoring made possible by manufacturing technology that is far less labour-intensive than in the past.
Where capital expenditure has fallen for decades and particularly since the global financial crisis – to the point where the average age of private fixed assets in the United States is five years older than in the 1970s and ’80s – the postmodern cycle is likely to be marked by a jump in capex as firms seek to simplify their supply chains and decarbonise, and nations spend more money on national security.
And finally, where the period since the GFC has been largely deflationary, this new cycle will be inflationary, as the cheap and abundant energy and labour we’ve become used to over the past 20 years become scarce and expensive.
The Japanese government’s attempts to push down energy demand amid rocketing prices – by asking citizens to switch off their toilet seat warmers –might sound silly, but it reflects an example of how Oppenheimer sees the world changing.
Even if the war in Ukraine ended tomorrow, Europe seems certain to make permanent efforts to diversify away from Russian gas. But with ESG concerns rampant and the world screaming out for an energy transition that is already moving too slowly, finding new sources of gas is unlikely. The result is a global tug of war for energy that is already leading to higher-for-longer prices – and inflation that remains sticky long after supply chain disruptions have faded.
Similarly, the fertiliser crisis that is forcing Ghanaians to pay much more for food and US farmers to scour the world for chook poo won’t be solved quickly, particularly in a world where climate change is making food production more challenging.
And although Australia might hope that immigration can solve labour shortages and cool wage growth, it’s worth noting that every other Western country with an ageing population has the same plan; demographics mean that not every nation can win.
The inflation/rates trade-off
There are some who disagree with Oppenheimer’s view of a new cycle emerging.
Macquarie’s highly respected strategist Viktor Shvets does see governments becoming bigger and globalisation regressing in this new cycle, but he suggests that those who believe central banks will suddenly stop trying to engineer Goldilocks conditions as they’ve done since the GFC are wrong for two reasons.
First, he believes most of the inflationary forces we’re seeing now are transitory in nature and “background disinflation, which is today far stronger than it was in the ’70s (technology, financialisation, inequalities, and demographics), will re-assert itself”.
Second, Shvets says central banks will simply be unable to tighten too far because the huge levels of leverage that increase across the world mean rising rates will hit a bigger range of assets, from pensions to property to high-yield debt.
“We maintain that the Fed is more likely to be easing than tightening into 2023-24, and while defensives and staples are now outperforming, the time for quality and growth styles is getting closer.”
But perhaps Shvets and Oppenheimer aren’t that far apart. The head of the Blackrock Investment Institute, Jean Boivin, says if central banks are unwilling to raise rates to the point where they crash the economy, they will probably have to accept a higher level of inflation than they have in the past. And that has ramifications for investors.
Oppenheimer’s view is that in the postmodern cycle, tags such as “growth” and “value” will have much less importance.
Instead, he’s looking for what he calls “adaptors” that can adjust their business model to meet the new cycle, and can continue to deliver high and stable margins. Notably, several Australian companies fit into this category, and Goldman Sachs names Woodside Petroleum, CSL and WiseTech Global among a basket of global stocks.
Oppenheimer believes investors can back what he calls the “enablers and adapters” that can provide solutions that save money for businesses and governments, particularly through energy efficiency (think battery storage, nuclear technology and carbon storage) or through labour substitution (think automation, artificial intelligence and robotics).
Finally, he’s hunting for companies that benefit from higher capex – mining giant Rio Tinto makes Goldman’s basket of stocks in this area.
The picture Oppenheimer paints is of a cycle that will be much tougher for investors to navigate, and not just because higher rates usually mean lower returns.
The security blanket that central banks have provided to markets in the modern cycle in the form of ultra-cheap money has started to be taken away, leaving a world of scarcity that is vulnerable to volatility and shocks.
The bull market in everything, where every risk an investor took paid off, is over. Investors will need to hunt much more carefully for those pockets of solid returns.
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