Personal Investing
Graham Smith 23 Aug 2017 04:33pm

Jackson Hole: policy at a crossroads

SPONSORED FEATURE: On the calendar of international economic events, Jackson Hole is an oddly focused one. Marking the beginning of the end of the summer break, and often the tail end of a period of relative calm in financial markets, central bankers meet annually to compare notes on monetary policy and, no doubt, persuade others of their points of view
Caption: Jackson Hole gives central bankers a chance to meet and swap notes

This time round, as in the past few years, the task will be made harder by the fact that, while a raft of economic indicators point to a strengthening world economy, one does not, and that’s inflation.

Even in the US, with its now maturing economic recovery and low unemployment, inflation remains stubbornly below the Federal Reserve Bank’s (Fed) 2.0% target.

Last year, the Jackson Hole symposium followed just one rise in US interest rates the previous December and a rate cut in the UK – a precautionary measure following the Brexit vote last June.

Then, as now, wholesale short term rates in Europe and Japan were negative.

Fed chair Janet Yellen’s keynote comments were carefully put, signalling that US interest rates might be raised again soon but that “incoming data” would affect the decision making process. Markets had been looking for more assurances rates would not be raised in the near future and, since they didn’t get them, went into temporary retreat.

Yellen’s comments were broadly borne out by events. Rates were raised a further quarter point in December, not in September as some had feared; the apparent deferment, it could be said, down to a patch of weak American economic data.

This year attentions are set to be more split. While observers will be looking to Yellen to firm up the Fed’s plans to start selling the bonds it has bought since the global financial crisis, the focus will be shared with European Central Bank (ECB) president Mario Draghi. Since the bigger change in economic fortunes this year has come about in Europe, speculation has grown that the ECB might soon follow the Fed.

However, the puzzling lack of inflation globally this far into a synchronised recovery is likely to be a hot topic too. Conventional thinking has it that when unemployment falls to low levels – as it has in the US and the UK – wages and inflation should rise. That they have not in any large measure could be down to increased nervousness among workers living on far beyond the global financial crisis, a sluggish oil price or the cost benefit effects of automation.

Ultra-low interest rates and quantitative easing – whereby central banks print money to spend on buying paper assets, mostly bonds – are credited with saving the world from a great depression after the global financial crisis.

These policies have produced gaping imbalances too. Assets, of course, have performed well. Bonds, equities and property are all up strongly since the financial crisis. However, a translation of these effects into the broad economy has proven much harder to achieve.

Arguably an uneven distribution of wealth arising from central bank policies has galvanised the populism behind Brexit, the rise of US president Donald Trump and big gains in support for unconventional political parties across Europe. In the UK, the Resolution Foundation estimates that average earnings are still below their pre-crisis peak.

In symposium parlance, there may be several “key takeaways” for investors from all of this. First, the world has been left with clear bunches of winners and losers, with asset owners and borrowers on one side; savers and low paid workers on the other.

This is reflected in business too. Companies tapping into diverse trends have tended to do well – property developers, asset managers, luxury goods makers, online retailers and the discounters, for example. The case for investing in actively managed funds as opposed to index trackers has rarely been clearer.

Second, investors need to be prepared for challenging times ahead, as central banks move closer to relinquishing their crisis strategies. Businesses that have prospered in an environment of ultra-low interest rates may do less well as rates rise, while others, like banks, might be expected to do better.

Another consideration is the likely effects that an eventual unwinding of central bank bond purchases might have. The gradual removal of the bond market’s biggest and most reliable buyer could drive bond prices lower and bond yields higher.

At the margin, higher bond yields would make corporate bond issues a bit more expensive, reduce the cash available for share buybacks and leave stock markets looking slightly riskier on a relative basis. However, equities are likely to continue to benefit from a growing global economy, rising corporate earnings and the prospect of still low returns from cash.

Fidelity’s Select 50 list of favourite funds contains several designed to ride out short-term market cycles with highly active (very unlike the benchmark indices) fund strategies.

The Rathbone Global Opportunities Fund seeks out sustainable growth worldwide so, unsurprisingly, familiar American names are among its top holdings – Amazon, Facebook and Visa being prominent examples. The CF Lindsell Train UK Equity Fund sets its sights on UK companies with attractive growth credentials, though many of these have a global reach. Diageo and Unilever comprised about a fifth of this fund’s assets at the end of June, with the luxury goods brand Burberry also featuring prominently.

Graham Smith, Market Commentator

Graham Smith

Graham has worked for some of the biggest names in the City, including Schroders, Invesco Perpetual and Gartmore, as well as the World Economic Forum in Davos. Today he writes independently on a range of market and investment issues.

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