Weekly Market Update: From pandemic to Sustain-omics: The end of liberal capitalism?

Mon 01 Nov 2021

Market Update

Equities in most major markets posted gains last week with global stocks up +1.4% in Sterling terms, amid stronger investor sentiment. US stocks were up +2.0% as positive earnings surprises continued during the busiest week of the earnings season. EU stocks were up +1.2% amid strong corporate earnings, while UK stocks were up +0.5% as the OBR revised its outlook for the UK economy upwards. Globally, consumer discretionary and IT were the best performing sectors while financials and energy were the worst performing. The US 10Y Treasury yield was down 8bps finishing the week at 1.552%, while the UK 10Y yield was down 11.1bps reaching 1.034%. Sterling was down -0.5% against the US Dollar. In US Dollar terms gold was up +0.1%, while oil was down -0.6% to $84.2 per barrel.

CIO Analysis

What do last week’s British budget and COP 26 have in common? The possibly inevitable return of ‘Big State’. 

The 1980s ushered in an era of lower taxes and reliance on consumers to fuel growth. The Covid-19 pandemic, twelve years after the global financial crisis, followed by a decade of ‘Sustainability Economics’ may have put a tombstone on Ronald Reagan’s chapter of liberalism for western economies.

When this pandemic started and governments stepped in to save companies hit by lockdowns, we argued that the future would see an augmented role of the state in western liberal economies. Our commentary focused on the government’s role in directing industry towards desirable goals. This made sense. The non-financial corporate sector has the heftiest debt load except governments themselves and could not be given a blank check with public money.

Last week’s British budget revealed another dimension of state intervention. Fiscal spending fuelled by higher taxes. The fact that this comes from a Conservative party may look surprising, but it demonstrates how pragmatism and need can easily trample and possibly redefine ideology. And this could be just the beginning. While this is a pandemic-related budget, we have every reason to believe that the coming era of ‘Sustaina-nomics” may well feature even more consumer dis-empowerment. 

During the last crisis, twelve years ago, governments avoided fiscal interventions and instead let central banks and quantitative easing do the heavy lifting. As a result, the financial economy grew exponentially while the high street economy stagnated. And where the latter grew, it did so in the direction of tech products. Consequently, the eight first companies in the S&P 500 belong to the tech sector and account for more than a quarter of the world’s leading equity index. Clearly, what little growth western economies experienced, was neither equitable nor in any way balanced.  Classical economics assumes that aggregate consumer spending will always lead to the wisest economic decisions. But decades of rapid growth have led to the depletion of natural resources to the point where the human species is adversely terraforming its own home. As debts pile for future generations and the air becomes thicker, the prevailing thinking amongst political leaders is that too much is at stake to let consumer randomness decide the next steps of economic development. 

As we enter the era of ‘sustainable’ economics, we will have to come to terms with a considerably bigger state and, at least for a decade, possibly higher inflation. Post-pandemic pressing realities may be just the start. In the next few years, the western consumer may not nearly be as empowered as in the previous decades, if the world economy is to be set on a more sustainable path.   

–David Baker, CIO