21 May 2024
Jonathan Platt, Head of Fixed Income
There is a programme on TV called 'Race Across the World'. I would recommend it on three levels.
First, it’s a travel programme, showing the amazing sights of the countries through which the participants navigate. Second, it shows the culture of the peoples in those countries. Third, it is about human relationships and how the contestants, individually and as a couple, cope with the challenges they face. It is a race but also balanced by the desire to see sights and be immersed in diverse cultures.
It is a strange observation that the UK, being an open society and one influenced by migration trends over many centuries, fails to appreciate the global challenges we now face. There appears to be a growing insularity, based on a nostalgia for past glories and an unwillingness to learn from others. We seem to be unconcerned about the significant shift in global economic, and ultimately political, power that is underway. Yes, the US remains dominant but its leadership is slipping. Europe has been going backwards, in a relative sense, for over a century. The rise of Asia and other emerging economies is not a new theme – but the pace of relative gains is increasing.
From an economic perspective this may not seem to be all bad news: rising global prosperity floating all boats. And capitalism, free or managed, has been the most important contributor to higher global living standards, including longer life expectancy. But you would be hard pressed to hear this from our European leaders. As societies we have lost sight of the big picture, preferring to focus on internal cultural issues, rather than facing up to real challenges. The profit motive, embedded in capitalism, works on competition and if you don’t compete, you lose. European societies will not be able to deliver the improved services expected by its people on present trends. We have become complacent.
The current series of 'Race Across the World' is based in Asia. Starting in Japan, the objective is to get to Lombok in Indonesia, on a limited budget with no recourse to personal mobile phones or air travel. Japan is on my travel plans and appears to be a fascinating country, especially as their infrastructure appears massively superior to ours. Likewise, China has invested heavily in upgrading its transport and a research piece I read last week struck a chord. The premise is that China has changed in recent years, with high quality infrastructure in many cities, and a re-orientation of the economy from real estate and cheap consumer goods to more value-added products and services. The digitalisation of China, especially in finance, is significantly outpacing developments in Europe and the US. What 'Race Across the World' is showing is that places like Vietnam, South Korea, Cambodia, Malaysia, and Indonesia are showing exceptional dynamism. On my reckoning the planned route, including China, would take the contestants through countries with a combined population almost twice the size of Europe and the US. In the next few decades, the competition from Asia will only intensify.
From a bond market perspective, the savings generated in Asia, including the Middle East, have found their way into US and European bond markets, keeping yields relatively low. Over time, this support will diminish as local bond markets develop and domestic consumption rises. The phrase “reliant on the kindness of strangers”, used by Governor Carney when head of the Bank of England, in reference to the gilt market, can be more widely applied to other western government markets. The excess consumption that Europeans and Americans have enjoyed, courtesy of capital flows, will not last and running big budget deficits is becomingly progressively dangerous. Yet, we face a tsunami of US treasury issuance, according to Barclays Bank in their latest Equity Gilt Study. The bottom line is that we can expect more bond volatility, steeper curves and higher real yields compared to the pre-Covid period.
Europe is caught in a bind, facing the same debt issues but without some of the enterprising spirit seen in the US. People want better services, but we have become less competitive. In the UK, the botched attempt by Prime Minister Truss to address the UK’s growth issue had two real consequences. First, it has emphasised the importance of keeping bond markets on side. Second, and perhaps of deeper significance, it has quashed the debate on how we address the growth challenge against a rapidly changing world landscape.
On the market front, government bond yields trended lower last week, with 10-year rates closing at 4.4% whilst in the UK, 10-year yields nudged towards 4.1%. The euro area was the laggard, with yields broadly unchanged. Credit spreads remained on a downward trajectory. In sterling, non-gilt indices saw spreads back to the level seen in late 2021, a full 100 basis points lower than at the time of the LDI crisis in September 2022.
Staying at the top is difficult. Others learn to compete better, complacency sets in and the big picture is missed. History shows that it is hard to reverse these trends. Leadership becomes key. That no football team has won four consecutive English top flight league titles in well over 100 years – until yesterday – shows, in microcosm, the difficulty of staying at the top. As great as Jurgen Klopp at Liverpool has been, it was his misfortune to go head-to-head with the outstanding football leader of our time in Pep Guardiola.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.