Page 15 - DIY Investor Magazine | Issue 33

JL: Will the huge sanctions against Russia by the EU, US and UK on Russia, which is such a huge gas exporter, delay or reduce the interest rate hikes that we’re all expecting, especially in the States?
MT: On balance it probably does, but we have to remember that there are factors working both ways here, and I think the reason why central banks are looking to raise interest rates
is really because of inflationary pressures that we’re seeing across the economies in the US and Europe in particular, but also elsewhere.
Unfortunately, the situation in Ukraine, the conflict, is actually going to accentuate those problems. If you think about what’s happening: disruptions to oil markets and gas markets – Russia is a big supplier of oil, it supplies over 40% of gas to Europe and we’re seeing some quite sharp price increases, as the sanctions come in and I think market participants anticipating what may happen in the future.
‘UNFORTUNATELY WAR TENDS TO BE INFLATIONARY, BECAUSE IT DISRUPTS PRODUCTION AND IT STOPS THE FLOW OF GOODS’
Also Ukraine is quite important for food markets – a big producer and exporter of wheat – so that’s going to be disrupted, putting the pressure on food prices. Unfortunately war tends to be inflationary, because it disrupts production and it stops the flow of goods. But having said all of that, monetary policy, which is what central banks have control over, you can’t really do that much about that sort of disruption. It really works through the demand side.
So I’m not sure they would really respond to that sort of inflation by becoming more hawkish than they already are.
Would they become less hawkish? Well, possibly. I think here it would probably depend a bit on what the economic impact is, and there clearly is going to be an economic impact from what we’re seeing. We just look at the extent at which prices have been going up and will continue to go up. It’s going to have an impact on consumers. It’s going to affect real incomes.
Real disposable income is probably going to go down in many countries this year, and that will have a negative impact
on economic growth, which other things being equal, would suggest that the central banks probably would be less inclined to raise interest rates.
It’s also, as we’re seeing on a daily basis, having a negative impact on financial markets. Central banks increasingly are very focused on financial markets, really ever since quantitative easing, it has become so embedded in the system; the financial markets themselves have become an important mechanism through which their policies can impact the economy.
And so if financial markets are very weak, then that could also cause them to take their foot off the accelerator. I don’t think we’re quite there yet, but we could get there. So on balance
I think I’m with you, I think yes it probably does make it a bit less likely, but we have to keep in mind that there are factors working both ways here.
JL: Can you tell us a little bit more about the market rotation and how it’s reflected in the performance of the markets?
‘WE LIKE VOLATILE MARKETS, WE LIKE IT WHEN THERE ARE BIG MOVES, BECAUSE IT CREATES OPPORTUNITIES FOR US’
MT: It’s been a real savage rotation that we’ve seen in the first weeks of 2022, and by rotation what we mean when we say that is really actual rotation within the stock market, and in this case it’s been away from growth stocks and into value stocks.
Growth stocks being those companies that are experiencing rapid growth in revenue and earnings, and typically trade on high valuations where much of the value is earnings and cash flows that are expected to be delivered a long way in the future.
Whereas value stocks are those where the valuations are lower and there are more cash flows and earnings in the here and now.
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DIY Investor Magazine · Apr 2022