Joe Bunting
Markets have rallied from their lows of last week (week commencing 7 March) with some record performances from regional equity indices, China and Germany notably. But so much turns on the outcomes of war and, dare we say it, peace. This uncertainty is binary for the direction of economies, especially in Europe, significantly but less so in the UK, and perhaps least of all in the US. The US is far removed from the conflict here in Europe and their resource independence and scale of their internal domestic economy may give more resilience to their business cycle.
That is the current view we heard from the Federal Reserve this week (commencing 14 March). What develops between the US and China over their support of Russian action in the Ukraine will however have profound implications too, as Trump's trade war with China so clearly demonstrated.
Added to this outlook is a sequence of interest rate hikes from central banks announced in recent days that put into question the longer-term strength of the business cycle in the face of persistently rising input costs and inflation squeezing consumers' costs of living. And that's before allowing for tax increases needed to repay extended government borrowing to fight Covid. This implies a structural shift towards US investment markets for resiliency, towards materials and energy stocks for further investment and hedge to these more persistent inflationary effects, and towards capital equipment to assist in this buildout.
The cycle itself may be fragile everywhere, vulnerable to the existential threat of war, but the response should drive an investment and growth impulse. And while it can reasonably be hoped there may be a peaceful resolution in Ukraine, this impulse will hardly diminish, and should re-energise the cycle we had in prospect before the conflict broke out.
Notable gains in the Endeavour Fund this past few trading sessions may be reflective of these themes: Linde (industrial gases), Ceres Power (hydrogen fuel cells), Caterpillar (capital equipment), Charles Schwab (broker), and Freeport McMorran (coper mining).
