Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Key Takeaways for Investors:
- Market Resilience Dominates Short-Term Noise: While geopolitical events, economic crises, and even high valuations can trigger significant short-term volatility, history shows that global markets often demonstrate remarkable resilience, with long-term returns driven more by underlying economic growth and innovation than by transient shocks.
- Structural Shifts Have Profound Impact: Truly transformative events, such as China’s integration into the global economy via the WTO, fundamentally alter market dynamics by influencing supply chains, commodity demand, inflation rates, and capital flows for decades. These are the forces investors must identify.
- Policy Responses Create Lasting Legacies: The unprecedented fiscal and monetary responses to events like Covid-19 can create new paradigms for government debt, inflation expectations, and investor demands for state intervention, shaping future market risk premiums and asset allocation strategies long after the immediate crisis subsides.
When children are in such a funk they reject everything, it’s useless offering more options. Burgers, pizza, sushi? No, no, no! The only way out is to flip the onus. OK, tell me what you want.
Heads explode. Being forced to give a positive answer instead of dismissing all and sundry is a challenge. And one I’m embarrassed to say it’s time to set myself. I’ve spent decades arguing that not much matters for investors in the grand scheme of long-term returns. So what does, eh?
I’ve been pondering this again recently as another war comes and goes without huge repercussions for broader equity or bond market returns. Sure, oil traders have wet themselves, driving crude prices up and sending ripples through commodity-sensitive sectors. But for the vast majority of diversified investors — so far — it’s the same downy uppity as ever, characterized by persistent growth in earnings and an underlying belief in market recovery.
Indeed, in previous columns I’ve shown that geopolitics, while capable of inducing sharp, often terrifying, volatility, can mostly be ignored when it comes to long-term asset prices. Likewise, interest rates, tax regimes, governance standards, and even the prevailing political winds often prove to be short-lived determinants of portfolio performance. Markets, being forward-looking mechanisms, tend to price in expected outcomes quickly, and then move on, often focusing on the more enduring currents beneath the surface.
Most of this was known to me before I started as a portfolio manager three decades ago. The historical data is unequivocal: markets discount fear and greed with remarkable efficiency over time. Looking back now though, it still amazes me how little the events we were freaking out about at the time actually changed anything for an investor committed to a long-term strategy.
The Asian and Russian crises in the late 1990s, for instance, sparked fears of global contagion and currency collapses. Emerging markets saw massive capital outflows and sovereign defaults. Yet, these events barely distracted us from the money we were making in dotcom stocks, as the speculative fervor for internet companies overshadowed regional economic woes. The lifts didn’t stop working at midnight on December 31 1999, either, despite widespread Y2K panic that briefly impacted tech spending. When the dotcom crash eventually came, it was brutal but relatively contained, largely completing its cycle in 24 months, paving the way for a new bull market.
The financial crisis of 2008-09 was even shorter in its acute phase of market dislocation. While it felt existential at the time, leading to unprecedented government intervention and central bank actions like quantitative easing, the market rebound was swift. All but $30bn of the troubled asset relief programme money — some $440bn — has now been paid back, a testament to the underlying resilience of the financial system. US banks, once on the brink, reported bumper profits (and bonuses) in the ensuing years. Plus ça change, indeed, as credit spreads normalized and risk appetite returned faster than many predicted.
And you can imagine working at Deutsche Bank during the Eurozone debt crisis. Boy did we panic over Greece, Spain, the lack of a fiscal union, and the existential threat to the single currency. Sovereign bond yields for peripheral nations soared, and the specter of “Grexit” or “Spexit” loomed large. Yet, with Draghi’s “whatever it takes” pledge and a concerted political effort, it all blew over. Indeed, the countries we worried most about, having undergone painful but necessary reforms, are booming now, demonstrating how market fears, while intense, often exaggerate long-term systemic risk.
But it’s not only the Brexits, tariffs, and Ukraines that fail to smother returns, as we thought they might. Sky-high valuations, a constant source of anxiety for value investors, don’t seem to bother growth-focused investors either, especially in a low-interest-rate environment. Nor do extreme equity concentrations, such as the current dominance of a handful of mega-cap tech stocks. Even autocracies as trading partners, or any of the supposed “megatrends” such as demographics or climate change, while important societal issues, have often proven to be slow-burn factors for market pricing, absorbed gradually rather than causing immediate, cataclysmic shifts.
What does make a difference, then? If I’m the moaning child who keeps shaking my head, is there anything over my career that has had a meaningful, structural effect on investment returns?
Actually, there are two. The first — China’s admission to the World Trade Organization in 2001 — has had a massive, indelible impact on global economics and finance. Right before it happened, I remember sitting in a Sydney office listening to arguments about why the Australian dollar — commodity-heavy and internet-light — would depreciate forever. The consensus missed the forest for the trees.
Nope! Thanks to easily the biggest consumption of natural resources in history, driven by China’s industrialization, the country of my birth has been rolling in money ever since. At its peak, China accounted for half the world’s copper, aluminium, cement and iron ore consumption, fueling a commodity supercycle that enriched resource-exporting nations and reshaped global trade flows. Meanwhile, the toys, gadgets or furniture we once looked after so carefully dropped so far in price as to become disposable, as Western consumers couldn’t buy enough cheap goods, racking up massive trade deficits with China. The corresponding “savings glut,” written about for years by my colleague Martin Wolf, was a major reason for a decades-long fall in global inflation and borrowing costs. This disinflationary force allowed central banks to keep rates lower for longer, fueling asset price appreciation across the board. Got a bond or credit trader friend with a mansion and Ferrari? Cheers WTO – you facilitated a golden era of low-cost capital and robust credit markets.
The second is Covid-19. Unlike the above, however, in some respects it’s too soon to tell the full market ramifications. The worst repercussions are still to come, perhaps in the form of persistent inflation or sovereign debt crises.
We know governments took on huge levels of debt during the pandemic. Some vital, much squandered. Few politicians recite the spending numbers today; they are too big to swallow. Some $5tn of Covid relief funding in the US was more than 10 times gross disbursements from the financial crisis. The low single-digit billions spent per day in Iran or on the Artemis II mission are irrelevant in comparison to this fiscal splurge. In many western countries, unsustainable net debt to output ratios would be around a fifth lower if it wasn’t for the pandemic. If bond markets eventually swoon under the weight of this debt, demanding higher risk premiums, the writing of blank cheques during this period will be much to blame for a shift in global capital flows and interest rate paradigms.
It’s also too soon to tell because post-Covid, voters now demand that governments bail them out of every problem — from oil shocks to expensive student debt. This “moral hazard” created by government intervention makes it impossible for politicians to make vital structural reforms, say to welfare or pension systems, without facing immediate public backlash. The market implication is a potential for higher taxes, greater regulatory burdens, and a slower pace of productivity growth, all of which could weigh on future corporate earnings and equity valuations.
So yes, two things have mattered over my investment career so far, fundamentally altering the landscape for decades. I’m not sure I have the nerves to handle a third right now, given the ongoing reverberations of the last two.
[email protected]
Market Impact:
For investors, the central message is to differentiate between transient market noise and profound structural shifts. While short-term volatility from geopolitical events or economic scares can create tactical trading opportunities, long-term portfolio construction should prioritize exposure to enduring economic trends and adapt to fundamental changes in global finance. The legacy of China’s WTO entry underscores the power of globalization and industrialization to reshape commodity markets, generate disinflation, and influence bond yields for decades. Conversely, the Covid-19 pandemic’s lasting impact highlights the risks associated with unprecedented fiscal expansion and the potential for a permanent shift towards higher government debt, elevated inflation expectations, and increased state intervention in economies. Investors must remain vigilant for how these post-Covid policy paradigms will affect interest rates, currency valuations, and the long-term profitability of different sectors, particularly those sensitive to government spending, taxation, or regulatory oversight. Adapting to these long-term forces, rather than reacting to every news cycle, remains the cornerstone of successful investing.