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With markets near all-time highs is investor complacency setting in?

‘At this point in time the concern is certainly inflation … again coming to the market’: Dhiren Mansingh – head of treasury, sales and structuring at Investec.

SIMON BROWN: I’m chatting with Dhiren Mansingh, head of treasury, sales, and structuring at Investec. Dhiren, I appreciate the early morning time. You sent a note out earlier in the week around volatility catalysts. Volatility – we’ve seen it extremely in the last year-and-a-half – truthfully is a function of the market. Your concern is that markets are at or near all-time highs. You are worried about some complacency setting in, investors almost taking it too easy. 

I was chatting with Wayne McCurrie a moment ago. He called it ‘priced for perfection’. But there are risk areas. One that you highlight is inflation potentially resulting in interest-rate hikes that could almost turn the market on its head.

DHIREN MANSINGH: Sadly, Simon. Thank you. You rightfully say that volatility is part of markets. We live with volatility all the time, but markets are forward-looking. They price in the forward-looking picture of the market. When there is uncertainty we have bouts of excessive volatility. At this point in time, the concern is certainly inflation, and review inflation again coming to the market. When we have a catalyst like we’ve had with Covid, the central banks react with two measures. One is they inject stimulus money into the system, and the other one is they cut interest rates both to increase growth levels and increase demand in the economy. They’ve done that and done that quite aggressively post-Covid. 

The concern now is their reversing that as a result of inflationary pressures. There have been signs of inflationary pressures coming through the system which have been caused by demand-side pressures, as well as supply constraints in the global economy, just the supply side being stuck as well as base effects of commodity prices and fuel prices have increased significantly. These are resulting in signs of inflation coming back to the system, which then poses the risk of central banks reversing their two levers – pulling liquidity back from the system and then hiking interest rates – which then reprices asset markets because, as inflation increases and interest rates increase, the real returns on bonds and equities reduce, and therefore their prices reduce as well.

SIMON BROWN: You make the point that markets are forward-looking; they’re trying to price in the future. But there are two other issues that you raise. I think the market is fundamentally ignoring potential tax increases in the US and China tightening policy; both of these potentially are fairly significant issues for markets. And yet investors seem not to even be considering them at this point.

DHIREN MANSINGH: Correct, Simon. You mention China. China’s stimulus into the economy has been unprecedented. It has social financing, which is its sign of credit extension, which is 100% higher year on year – which just shows you the extent of stimulus in that economy. That goes into the hands of the consumers, which then drives demand, drives growth, drives demand for commodity prices as well. At some stage that will be reversed.

But the central banks, even in the US, have been very cautious in not spooking the markets and suggesting that they will not be pre-emptive in hiking interest rates. So we saw a mini-wobble on June 15, a couple of weeks ago, when the Fed announced that it would be putting forward interest-rate hikes by one year – from 2024 to 2023. 

We saw that the rand, as well as other emerging market currencies, depreciated – we were close to R13.40/dollar – to R14.40/dollar. It has come back a bit again. Since then the Fed has calmed the market, suggesting that it will not be pre-emptive and will hike interest rates only when it sees sustained inflationary pressures. 

Read: The rand goes from best-performing to worst-performing emerging market currency

But that certainly is a risk in the system, both in China and in the US, as well as in the UK and in Europe. Europe is experiencing business activity increases, the highest experienced in the last 15 years, which shows you the robustness of their economy as well.

SIMON BROWN: Investors are sitting with this. Certainly, markets are doing great. They’re at their highs. But there are risks at the end – and truthfully there are always risks. They are perhaps this time a bit heightened because of where we are post-pandemic. How does an investor position? Do we take some off the table? Do we perhaps look for structured products with downside protection?

DHIREN MANSINGH: It’s not all negative news. Here I go back to the global financial crisis in 2006/7 when Ben Bernanke, the then chair of the Fed did his ‘taper tantrum’. That’s where the term came from in 2013, where he really spooked the market and aggressively pulled liquidity from the system, and hiked interest rates. We saw how that affected asset prices, bonds, equities, and emerging market currencies quite negatively. I think central banks around the world have learned from that and are very cautious about doing the same. 

As such, I think they want to ease both of those levers back quite slowly, and therefore the one positive is that we may not see quite the shock we did back in 2013. That should be quite comforting for investors. However, there is still a concern of interest-rate hiking, but at least not in a very aggressive way. So there are some positive signs for investors as well. 

The other positive sign is that this demand for commodities may last longer than we think. We may be in a supercycle, and supercycles are where the demand for commodities lasts 10 years and longer and we see increases in prices. Many of the world’s economies have suggested that they would get to net-zero anywhere in 2040, in 2050. That really signals a move to renewable energy versus current sources of energy, which use more metals, and also a move to electrical vehicles which also use more metals than current vehicles. As such, we should see that translate into a sustained demand for commodities, which then provides support for those prices and support for commodity currencies and countries as well.

SIMON BROWN: Okay. In essence, central banks the world over are the ones we need to watch in how they manage this process. We’ll leave it there. Dhiren Mansingh, head of treasury, sales, and structuring at Investec, I appreciate the early morning time.

Listen to Thursday’s full MoneywebNOW podcast here.

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