Page 10 - DIY Investor Magazine | Issue 36

Dec 2022 10
DIY Investor Magazine ·
THE BRUNNER INVESTMENT TRUST PLC A WORLD RUNNING TO STAND STILL
Extract from the latest ‘Connected Investor’ podcast from The Brunner Investment Trust.
Inflation is rampant and central banks are reacting strongly with associated rate rises. At the same
time some governments are looking at policies reflecting a very present need to try to buffer current hardships for people. Given Brunner’s focus on growth stocks that have been hit particularly hard by this high inflation and rising interest rate backdrop, will this affect the investment philosophy at all?
Podcast host Joe Lynam talks to Brunner’s Lead Portfolio Manager, Christian Schneider.
Joe Lynam: What is the situation regarding risk of recession in Europe?
Christian Schneider: In Germany we have pretty skyrocketing energy prices. The government’s trying to do their best to support the consumer out there, make sure there are no casualties. Clearly lower income brackets, demographic-wise, are hurt by the significant change in energy prices across the board and there needs to be support. Yet we have to see these kind of measures on a broader scale.
And if we do so, it simply means government debt down the road, and government debt today means more taxes at some point down the road. We’re pushing the problem into the future, simply, and future generations, or we in the future, have to pay the bill on increased debt loads. That’s how it is, unfortunately, but it’s about currently buffering most of the hardships, which probably makes sense.
JL: Are central banks scrambling to catch up with rising prices and tame inflation?
CS: Absolutely. It was catching central banks on the left foot,
if I can put it that way. Last year on the back of reopening after COVID, there had been some significant bottlenecks in terms of supply chains opening up.
‘FUTURE GENERATIONS, OR WE IN THE FUTURE, HAVE TO PAY THE BILL ON INCREASED DEBT LOADS’
‘CURRENTLY, EMPLOYMENT IS SUPER STRONG, INFLATION IS SUPER HIGH, AND SO THEY HAVE TO TACKLE INFLATION’
China with still restrictive COVID policies, and less production and distribution in the country, led to further bottlenecks, and so we had this first wave of inflation.
Now, this was made worse when the war started in Ukraine, not just the energy prices that have been affected, but also supply chains around the globe and food prices. Ukraine is a large food producer for the world. Many by-products are produced in Ukraine, surprisingly, so we all learned – I certainly had to learn that this is the case. So a massive inflation push.
While central banks were hoping that this was evening off after COVID, it got a push and they had to accelerate the interest rate hikes. Even the European Central Bank just very recently increased interest rates by an unheard of 75 basis point step. Clearly this is going to continue until other measures are coming on the radar screen of the central banks. Taking the Federal Reserve of the US as an example, it has a dual goal of inflation and employment.
Currently, employment is super strong, inflation is super high, and so they have to tackle inflation. And I would suspect this is going to go on until unemployment starts to rise, and the Fed needs to balance the dual goal structure it has and then considers maybe slowing interest rates. And the same is probably true for most central banks around the world.