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The Tempest: Investing through a sea-change

Shakespeare’s The Tempest begins on a ship at sea, in a violent storm, with the crew starting to panic. Anyone managing portfolios in today’s financial markets recently might recognise the feeling … 

In that same play, Shakespeare invented the phrase “Sea-change.” In modern times, it’s normally used to describe a wholesale change in public attitude towards something. But I prefer the bard’s original maritime use, referring to a complete shift in the surrounding environment.

Because in the open ocean, the weather can swing almost instantly. It can be blue skies and sunshine in one direction, while the sky is boiling and dark in another. And that change from calm to choppy comes without any warning, catching out anyone who’s unprepared.

The investment world we’re now in has a lot of similar characteristics – and a number of ships aren’t going to weather the multiple storms.

Financial and economic sea-changes

Wherever you look in the world, things are being shaken up. Established tendencies and long-held beliefs are being examined and overturned, with different priorities battling with one another, creating uncertainty, fear, and of course, opportunity. Just one sea-change in an economic cycle is enough to cause upset in the markets – I think we’re facing about four or five.

Take the outlook for global energy. Moving away from fossil fuels requires around $3 trillion of investment per year, out to 2050. But at the same time, meeting short term energy demands also needs around $3 trillion in new fossil fuel investment by 2030! Such staggering sums of cash will create massive opportunities – but investors need to establish where the rewards will go. Is copper the new oil? Or is it still, well, … oil?

Or think about geopolitics. For the last decade, the focus has been on the evolution of the US-China relationship (thanks in large part to President Trump’s Twitter feed); and while that hasn’t changed, the war in Ukraine has reminded everyone that stability in Europe – one fifth of global GDP – is nowhere near guaranteed. Is there an old Cold War playbook to dust off, or is this something completely different?

Then there’s the return of inflation. Having spent years worrying about whether the Western world was going to follow Japan’s deflationary example (with modern-day Shakespeares inventing words like “Japanification”), suddenly everyone’s swinging in the opposite direction. And inflation is a phenomenon something that three generations of Westerners have no adult experience of – whether that’s people in supermarkets, or the people in power!

When it comes to monetary and fiscal policy, again things look radically different. After the financial crisis, interest rates were kept low, and governments largely tried to cut back on spending. Now, even right-wing governments are putting huge sums of money into the economy, while central banks are raising rates at an alarming rate. How these economic forces offset one another is going to be one of the defining parts of the next cycle.