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Our views 22 January 2024

JP’s Journal: The joke’s on us

5 min read

Davos is alive and kicking. Switching on Bloomberg TV in the morning to catch market developments, the screen is dominated by dapper looking executives kitted out in the latest fashionable winter attire, talking about the economic environment, the impact of artificial intelligence and how well their company is positioned.

In reality, it bores me – it feels like a PR exercise. Perhaps though the world of luxury is facing its own cost of living crisis. Watches of Switzerland are not selling enough gold Rolex watches whilst Burberry, LVMH and Diageo have all talked about tougher conditions. Davos Man (predominantly male) may be immune to these pressures, but the ‘ordinary’ wealthy are cutting back.

UK retail sales last week showed a more widespread downturn in spending. Whilst this series is highly volatile, the volume decline of 3.2% in December was eye catching; it looks like consumers brought forward spending to November – the Black Friday effect. This is in contrast to the Purchasing Managers' Index business survey data which indicated that the UK economy had picked up towards the end of the year. With recent labour market data and inflation figures suggesting that rate cut expectations are too ambitious, the Monetary Policy Committee will be scrutinising data even more closely to see which data trend prevails.

Back at Davos, the speech the new Argentine President, Javier Milei, dubbed the ‘anarcho-capitalist’ caught my attention. Let’s remember that a century ago, Argentina had living standards comparable to France, with a GDP per capita only 25% below that of the USA. Today, that figure is closer to 70% below. What went wrong? Corruption, uncontrolled spending, protectionism, regulation – a broad catalogue of failure. Argentina has been good at wine, beef production, football, and polo but not economic policy.

In his address, Milei warned about supine business leaders and government interference in a wide range of activities, including the search for solutions to perceived ‘market failures’. In essence, Milei is concerned that there is a growing rejection of the liberal capitalist approach. An overreaction, but the UK, as an example, has been moving steadily away from this model, towards a more corporatist approach. In my view, this stifles initiative, ingrains the competitive advantage of the incumbent, and encourages bureaucracy. There has to be a growing role for the State, as the provider of a safety net, especially given demographic shifts. But the challenge will be to harness government spending to get productivity moving forward again. The depressing case of Avanti, operator of the West Coast train service, is a prime example of government spending in the wrong way. Bonuses awarded to a company that has failed customers, is massively inferior to its predecessor, but still has the gall to talk about free money from the government. The joke really is on us, the taxpayer.

Last week also saw a couple of announcements that showed the transition path to net zero will be bumpy. Tata Steel will be closing its blast furnaces in Port Talbot. The replacement will be electric arc technology aimed at recycling used steel, rather than virgin production. It will take time for the redundant 2,800 to find jobs – even if green technology is ultimately a source of more employment. In Scotland, the Grangemouth oil refinery, targeted by Just Stop Oil last year, is to close and be converted to an import facility. A climate victory or an own goal? It shows that the just transition and net zero stewardship are complex subjects. Thankfully, we have a highly experienced Responsible Investment team to help.

In markets, bond yields trended higher; US 10-year treasuries closed above 4.1%, an 18 basis points (bps) move up on the week. It was the same pattern in the euro area; German 10-year rates hardened 16bps to 2.3% whilst Italy flirted with a return to 4% before closing at 3.9%. UK 10-year yields also finished at 3.9%, representing a rise of 40bps since Christmas. The message is the same – the disinflation path to lower rates looks a bit less certain. We still stick to the view that rates are coming lower but our caution on the speed seems justified. Movement in credit yields still primarily reflect changes in government rates. Spreads narrowed over the week, although the potential for heavier supply suggests the scope for further gains in the short term is limited.

‘Burn all your trophies’ is good advice. Do not look to past glories to sustain the present or future. Argentina was once a leading global economic power but lost its way. It can happen to all, even the preeminent power of the 19th century.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.