THE ROARING TWENTIES

Writing in the summer of 2021, it is still disappointing to see how slowly Western economies are opening up.  Boris Johnson just announced a month’s delay to the “Freedom Day” of June 21, until the middle of July, when British consumers and travelers will again be free to move around without restrictions.  The European countries are now beginning to waive quarantine requirements for those who have been fully vaccinated.  (Vaccination is also beginning to accelerate in Japan, Hong Kong, Singapore, and other Asian countries at last.)  But the real question is whether, when this strange period comes to end, if we shall have a consumer and investment boom.  It is estimated that American consumers may be sitting on accumulated savings, from government handouts and a year of not shopping, of over US$700 Billion; and in the UK, it is also estimated at over £280 Billion.  There is no question that there is a pent-up demand to travel, to spend, and to party. 

In September, the handouts will end; and people will have to go back to work, willingly or not.  The on-line spending will certainly be a constant feature of our lives in future, but most consumers will also go back to spending in person.  Meanwhile, inflation, in the USA, has been running at nearly 5% year-on-year, at the end of May; and the era of China, exporting deflation since the 1980s, has definitely ended.  All raw materials prices, including metals and foodstuffs, are rising rapidly; and it is forecast that oil will reach US$100 a barrel by year-end.  There is some irony in the fact that the exponents of green living have cancelled pipelines and restricted oil companies’ exploration, and the consequence is dwindling supplies of oil.  We still believe that Asia, which trades on a 40% discount to the S&P 500, measured by price / earnings ratio or price to book, is cheap and will outperform.

 For those of us who grew up in the 1960s and 70s, seeing inflation at 25% in the UK, and 15% in the US, after the oil price shocks of 1974 and 1979, with interest rates reaching 15% on long-dated bonds, today’s inflation’s scare could almost be dismissed as an imaginary threat.  It seems possible that we might see inflation exceed 5%, in the next year or two; but there are also serious questions about the commodity price cycle, the impact of government spending, and also what will happen to wages.  Now that Biden and the Republicans have compromised on a US$1 Trillion investment package, it may be that the tax legislation will be slowed down. 

China is trying hard to suppress speculation in copper, iron ore and other key commodities.  The Biden team’s attempt to restore the 2015 Iran Nuclear Deal would increase supply on the world oil market.  There is a strong recovery not only in the USA, (with summer driving, large capital spending and business expansion), but also interestingly in the European Union, which has finally got its act together, (for instance, Germany has got vaccines up to over 50% of the population), so a strong rebound in the EU economy is likely in the second half, which will also boost prices in the short-term.  We may probably see negative interest rates in Europe and Japan on the way out, as the push towards higher inflation by the Central Banks in both areas is finally successful.  

In the meantime, we are conscious, as investors and as families, that the depreciation of our currency continues at a steady, if not accelerating rate, which is reflected in the soaring price of real estate and in commodities.  In our investment strategy, therefore, we are building in some inflation expectations to be prepared for a new cycle of rising prices. 

The really difficult question for investment managers is the balance now between technology and cyclicals.  We took profits in Chinese internet stocks, back in February, because of their clear overvaluation and speculative fever.  We reinvested in Hong Kong property, retail, and banks, in the expectation of the reopening of the Asian economies.  This has been delayed by the slow rollout of vaccines, even in Hong Kong and Singapore.  We believe that, in the second half, we will see these companies reflecting a real economic recovery.  But the question remains whether the highest earnings growth will not still be in the technology sector – not only in semiconductors, but also in e-commerce businesses, such as Alibaba, JD.com, and Pinduoduo in China, but also, notably in SEA, Ltd. in Southeast Asia.  The ease with which people can order food, as well as other items, on-line, has created a permanent shift in consumer preferences, compared to going to the supermarket and the shops. 

The situation in India has shown a marked improvement, with a steep fall in the number of cases after a very difficult period in April/May.  Now India is ramping up vaccinations faster than anywhere else in the world, at almost 6 million a day.  About 20% of the total population is now vaccinated.  We continue to believe that Indian corporate earnings will grow faster than any other country.  The sectors we like are consumer staples and consumer durables; and we expect the earnings of the banks, and the mortgage companies, to exceed expectations.  The really interesting moment will come when Asians start to travel again, which we expect to be in the 3rd and 4th quarters of this year.  Again, there is a pent-up demand, which will take some time to be satisfied; and airlines and hotels should have a very strong recovery.

Hong Kong

6 July 2021