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Sea change: investing for the next regime

Inspired by Mark Carney's 2019 speech of the same name, this series explores why inflation, slower growth and other extenuating circumstances are proving to be a tempestuous mix for investors.

Photo source: Zac Porter, Unsplash

Introduction  

A sea change is a profound transformation. Shakespeare first coined it in The Tempest to describe a literal change wrought by the sea, setting the scene for a tale rich with tragedy, comedy, magic and revenge.  
Our use is far more limited and prosaic, yet far more immediate for the work of investors.  

Our title was inspired by Mark Carney’s 2019 speech of the same name1, where he spoke of a “sea change in financial markets driven by growing concerns over the global economic outlook”. He referred to a sharp shift downwards in expected monetary policy and long-term bond yields, with trade tensions, policy uncertainty and fears about rising protectionism in a world where President Trump dominated political rhetoric.  

That sea change came before the coronavirus pandemic, greater awareness for the impacts of climate change, respondent sustainable transition policies, and a new war in Europe. This sea change is the result of all these accumulated impacts that have created the current storm. 

How this complexity translates into investment decisions depends on the tools of the investor. At Anthos, we study a number of macroeconomic scenarios which act as a guide, or compass, to strategically allocate assets for our clients. The current macroeconomic scenario is one of slower growth, higher inflation and uncertain monetary policy expectations in a phase that we call “stagflation”. Given this is a particularly problematic scenario, we are zooming in on it in this series of papers.  

To explain, the past few months have once again shown how the unexpected can approach upon our lives. As long-term investors, we strive to “look through” even geopolitical events or oil crises if their impact is deemed temporary and disconnected from the fundamentals of financial markets. However, the scars of the coronavirus pandemic are showing more clearly in the context of this crisis. War, energy and food security, and a sharper set of green policies now join the pandemic-driven inflation, slowing economic growth, and transition away from fossil fuels that we were already witnessing before Russia invaded Ukraine. All of these things are connected, with first, second, and third-order impacts.  

Understanding those impacts is critical to our work. Using our macroeconomic scenarios framework and definitions as a guide, in this Sea change: investing for the next regime series, we explain how we are navigating through this particular stagflation regime. In so doing, we hope to show how we make investment decisions, not just to weather brief storms like stagflation, but also to navigate a much longer journey as long-term, active and responsible investors. 

1https://www.bankofengland.co.uk/speech/2019/mark-carney-speech-bournemouth-regional-visit 

 

This is a marketing communication. Please refer to the Private Placement Memorandum of Anthos Fund II RAIF-SICAV S.A. ("PPM") before making any final investment decisions. The PPM may be provided upon request. Please note: these funds are open to professional investors only.