The “everything” bull market is over
“It has benefited from sustained declines in inflation, interest rates and risk premia,” he says. “Geopolitical tensions have eased and supply-side reforms have accompanied waves of deregulation, the end of capital controls, deeper capital markets and stronger growth in global trade. A new era of globalization has pushed the share of profits in GDP to record highs. Independent central banks and forward-looking guidance have contributed to longer and less volatile business cycles.
But what’s coming now, says Oppenheimer, is a “postmodern cycle” that looks very different.
Where interest rates have fallen for 30 years, they are now set to rise, but from emergency levels. This situation will be aggravated by the shift from quantitative easing to quantitative tightening.
A world of regionalization
While deregulation has been the watchword of governments for generations, this new cycle is likely to lead to bigger, more interventionist, and likely more taxed governments.
Where the modern cycle was characterized by globalization made possible by the absence of geopolitical tensions, Oppenheimer sees a world of regionalization, where tense geopolitics and security concerns lead to outsourcing made possible by far less intensive manufacturing technology in workforce than in the past. past.
Where investment spending has fallen for decades and particularly since the global financial crisis – to the point where the average age of private fixed assets in the United States is five years older than in the 1970s and 1980s – the postmodern cycle is likely to be marked by increased capital spending as companies seek to simplify their supply chains and decarbonize, and nations spend more money on national security.
And finally, where the period since the GFC has been largely deflationary, this new cycle will be inflationary, as the cheap and plentiful energy and labor we have grown accustomed to over the past 20 years becomes scarce and dear.
The Japanese government’s attempts to lower energy demand amid soaring prices – by asking citizens to turn off their toilet seat heaters – may seem silly, but it reflects an example of how Oppenheimer sees it. the world change.
Even if the war in Ukraine ended tomorrow, Europe seems certain to make permanent efforts to diversify away from Russian gas. But with ESG concerns rampant and the world crying out for an energy transition that is already moving too slowly, finding new sources of gas is unlikely. The result is a global energy tussle that is already driving higher prices for longer – and inflation that remains sticky long after supply chain disruptions have subsided.
Likewise, the fertilizer crisis that is forcing Ghanaians to pay far more for food and American farmers to scour the world for poo will not be resolved soon, especially in a world where climate change is making food production more difficult.
And while Australia may hope that immigration can solve labor shortages and slow wage growth, it should be noted that every other Western country with an aging population has the same blueprint; demographics mean that not all nations can win.
The inflation/interest rate trade-off
Some disagree with Oppenheimer’s view of the emergence of a new cycle.
Well-respected Macquarie strategist Viktor Shvets sees governments getting bigger and globalization regressing in this new cycle, but he suggests that those who believe central banks will suddenly stop trying to create Goldilocks conditions as they have done since the GFC are wrong for two reasons.
First, he thinks that most of the inflationary forces we are seeing now are transitory in nature and that “underlying disinflation, which is much stronger today than it was in the 1970s (technology, financialization, inequalities and demography), will reaffirm itself”.
Second, Shvets argues that central banks simply won’t be able to tighten too much, as huge debt levels rising across the globe mean that rising rates will hit a wider range of assets, from repos to real estate and high-yield debt.
“We maintain that the Fed is more likely to ease than tighten in 2023-24, and with defensives and commodities now outperforming, the time for quality and growth styles draws nearer.”
But maybe Shvets and Oppenheimer aren’t that far apart. The director of the Blackrock Investment Institute, Jean Boivin, says that if central banks are not to raise rates to the point of collapsing the economy, they will probably have to accept a higher level of inflation than in the past. And that has ramifications for investors.
Oppenheimer’s view is that in the postmodern cycle, tags such as “growth” and “value” will matter much less.
Instead, he’s looking for what he calls “adaptors” who can adjust their business model to meet the new cycle and can continue to deliver high, stable margins. Notably, several Australian companies fall into this category, and Goldman Sachs names Woodside Petroleum, CSL and WiseTech Global among a basket of global stocks.
Oppenheimer thinks investors can support what he calls “enablers and adapters” that can provide money-saving solutions for businesses and governments, especially through energy efficiency (think the battery storage, nuclear technology and carbon storage) or labor substitution (think automation, artificial technology). intelligence and robotics).
Finally, he looks for companies that benefit from higher capex – mining giant Rio Tinto makes Goldman’s stock basket in this area.
The picture Oppenheimer paints is of a cycle that will be much harder for investors to manage, and not just because higher rates generally mean lower returns.
The safety blanket that central banks provided to markets in the modern cycle in the form of ultra-cheap money has begun to be removed, leaving a world of scarcity that is vulnerable to volatility and shocks.
The entire bull market, where every risk taken by an investor has paid off, is over. Investors will have to search much more carefully for these pockets of strong returns.