2019 was the best year for global equities since 2009. Sino-US trade tensions failed to escalate into a full blown trade war and while the world economy certainly slowed, it didn’t match the worst predictions. Markets were also supported by the US Federal Reserve’s decision to reduce rates three times. Of course, as the cost of money heads south once again, this is a trick that becomes more difficult to repeat.
There is now talk of rate reductions in the UK as inflation remains muted according to the benchmarks now used to measure it. However, the drift from focusing on the Retail Price Index (RPI) to the Consumer Price Index (CPI) represents governmental sleight of hand. The latter does not include housing costs and the mathematics of its construction nearly always delivers a lower number than the former. Would the Government (any administration) follow this policy if CPI delivered higher inflation? The reality is that lower CPI inflation will likely be used to justify another rate cut, thus debasing monetary policy even further. If base rate is all of 0.75%, what credibility remains should it be cut from here? This neatly illustrates the madness of the vast majority of developed nations’ monetary policies, where there is now no appetite to normalise the emergency measures adopted to fight the financial crisis of more than a decade ago.
Who knows how long these policies can last? We are surprised they’ve lasted as long as they have but perhaps the answer is that if every country is doing it, reality can be suspended indefinitely ….. or almost indefinitely. Eventually, what must happen, will happen and that’s a major concern for us. Our investment stance retains its defensive flavour.