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Uncertainty = Opportunity

There is a Chinese curse that says, “May he live in interesting times”. Whether we like it or not, we live in very interesting times of danger and uncertainty. But, interestingly, they are the most creative and thought-provoking of times, presenting enormous challenges.

If you had said to me two years ago that the USA would be experiencing a 7% inflation rate and have interest cash rates at 0.8%, I would have thought it crazy and an economic impossibility. But there we are – how wrong we can be! Of course, that is about to change, and interest rates in the USA move steadily upwards and with our own Reserve Bank backflipping indicating that they will follow suit. The inflation bogey is amongst us, and the question is whether it is transitory or with us to stay.

All of us are witnessing costs rising from everyday coffee (did I mention that there is a coffee shortage in the world) to wages (a huge shortage of qualified people due to zero immigration) and housing and rental costs. But the point is it’s everywhere and not necessarily reflected in government numbers.

This situation presents a big headache to policymakers, especially in an election year. Sure, you can look to jack up interest rates, but what does this do to heavily indebted home buyers who, in many cases, are geared to the hilt and where it takes very little in the way of interest rates to push people over the edge? I wouldn’t like to be making that decision. Secondly, business carries debt, and it’s a mixed bag of results out there – but beware of heavily indebted stocks. And then we bring in investor behaviour bias – rising inflation always hits the price of stocks. The rationale is that rising input costs will adversely affect the cash flows and profits of the company. This is true, but in the same context, there are many companies with pricing power that are capable of passing on those costs to the end-user.

This all means that uncertainty is high and will bring on market gyrations – the 9% fall in stocks and the minor recovery will continue. I’m not saying it will lead to an eruption, but given the congruence of events – possibilities of war in Europe, the continuing Taiwan issue, and the continuance of the supply line crisis, means anything can happen and possibly from an event we haven’t thought about!

This is not to be feared – this is opportunity. Uncertainty creates it. For this reason, we have client portfolios positioned accordingly, waiting for a round of uncertainty that will take markets down 15-20%. Patience is a virtue.

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