If you didn’t manage to get a ticket to the annual MoneyWeek Wealth Summit last week, here’s a glimpse of what you missed.
Merryn opened proceedings by noting that we are experiencing a “multi-decade shift in the way that the world works”. An era of low interest rates, globalisation and cheap energy has been eclipsed by labour shortages, towering debts, energy crises, and war.
The money printing of the past decade, in conjunction with supply shortages caused by Covid-19, has given inflation a powerful fillip. It’s a gloomy backdrop – but there are silver linings for investors.
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Investing through financial repression
Our first speaker, financial historian Russell Napier, warned that overall global debt loads (private and public) are now so huge – the non-financial debt-to-GDP ratio in advanced economies is 281% – that the only way to reduce them without a nasty crash is to let inflation gradually nibble the real value of the debt away; the authorities will keep interest rates below inflation for some time.
How to invest in this inflationary era of “financial repression”?
Opt for emerging-market ex-China equities (developing economies are undergeared, with the exception of China), and the developed-world firms likely to benefit from a capital-expenditure boom fed by cheap credit and subsidised by governments. The boom will end badly, but in this sense, the ’20s will roar. Machinery makers will do well as we rebuild productive capacity.
The gloom may be priced in
Merryn then chaired the first panel, which discussed investing in the context of the shaky global backdrop.
Waverton Investment Management’s Bill Dinning noted that a lot of gloom is in the price; UK stocks, for instance, are on just nine times forward earnings, and the Supermarket Income REIT (LSE: SUPR) looks oversold.
James Ferguson of MacroStrategy Partnership thinks the recent fall in bonds is the beginning of a very long decline. This is 2007 for long bonds.
Bill and Ruffer’s Alex Chartres think inflation has peaked for now, but a key risk to the outlook is that the market is too sanguine about inflation falling back. Energy-market volatility, demographic factors, and friction with China could keep it high. Real, not paper assets, look appealing in these circumstances; consider commodities, said Bill.
Where to find income
The next panel explored the best places to find real income. Reinvested dividends account for the lion’s share of long-term returns, and Janus Henderson’s Laura Foll said the UK market is a good place to start. Unlike in other markets, valuations look very reasonable, discounting a recession; the yield on the FTSE All Share is about 4%.
Look beyond the blue chips such as GSK; mid- and small-cap stocks also offer juicy yields. These are often ignored. The UK payout ratio is lower than in 2019, so there is scope for firms to raise dividends further.
Out-of-this-world investments
Former presidential adviser Dr Pippa Malmgren then told us that we are in a “once-in-a-species moment”. The major powers are racing to establish dominance in space, with three key areas comprising the prize.
One is heliostats, or mirrors that can beam unlimited solar energy from the sun’s rays to earth. So no need for hydrocarbons anymore.
The second is the prospect of a ubiquitous internet, with satellites beaming Wi-Fi to earth. Finally, there is asteroid mining. We can now get cobalt, lithium and other metals we need for iPhones from space.
The future for property prices
After lunch talk turned to how bad the decline in residential property prices might get.
James Wyatt of Parthenia Valuation noted that, according to The Economist, prices are overvalued by 28% and 39% against incomes and rents respectively. They could drop by more than 35%.
Henry Pryor, a buying agent who buys a house a week, thinks they could fall by 10% over the next year.
On commercial property, MoneyWeek columnist Max King notes that the sector’s fall looks excessive given there’s hardly been a collapse in activity; shops and offices continue to be rented. Retailing has made a post-pandemic comeback and people are going to the office. Tips in this area include TR Property (LSE: TRY) and Regional REIT (LSE: RGL).
Powering the future
The panel on powering the future, appropriately, generated plenty of heat as well as light.
Barry Norris of Argonaut Capital is braced for an era of energy poverty. Fossil fuels still comprise 83% of our primary energy use, he said. If we decide not to invest in them any more, as governments apparently have, the price of energy will go up. If we try to replace fossil fuels with weather-dependent power, which is inadequate, inflation will rocket, as energy is the key component of economic activity, said Norris.
The extent to which renewable energy and storing the electricity it generates is viable and worth investing in remained disputed. Nuclear power, MoneyWeek columnist David Stevenson pointed out, will have to be part of the energy transition.
Entrepreneur Jim Mellon then told Merryn he reckoned Tesla would go bust, but he was impressed by the prospects for quantum computing and growing food in laboratories.
The final panel (which leant more towards sickly ’70s than roaring ’20s), produced a wide array of interesting ideas on where to invest now. The most eye-catching was the VinaCapital Vietnam Opportunity Fund (LSE: VOF), a play on a dynamic economy trading at a 13% discount to net asset value.
MoneyWeek would like to thank the event’s sponsors: Orbis, OptionsDesk, HANetf and The Pure Gold Company.
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