The Whig interpretation of history implicitly underpins a lot of Western thought. It sees political and societal development through the lens of liberal democracy with secular trends of technological advancement, greater political representation, freer speech, and all-round progress. I believe that this has been a good thing and reflects the maturing of societies – albeit at different paces.
And in many ways Western societies, with the odd hiccup, have progressed in this way. Over 250 years Britain, as an example, has gone from a primarily agrarian society dominated by an aristocracy to a democracy where all can vote and there is no property qualification, where literacy is exceptionally high, constant living standard improvements are assumed, a free press acts as a counterweight to State powers and there is recognition that the 'individual' is the true king.
But not everyone buys into this story. China and Russia represent a big challenge to these cosy assumptions. It is really hard, from a British perspective, to understand what drives these societies and why the advantages of liberal democracy are not self-evident. I have travelled only briefly in China and understand little of its people and history. What has struck me, however, is their pride in their ancestry, traditions, a strong sense of community and also a deference to authority and a willingness to make sacrifices for long-term gains.
We are now moving into a period of geopolitical instability – not for a few years but for the next generation or two. From a global perspective, dominant liberal leadership, once represented by Britain and which then passed to the US in the early twentieth century, is over for the time being. There are now other models available. China, with an outlook based on a timescale unimaginable to an elected government in the West, is consolidating itself as a true global power. And the problem for the Whig interpretation of history is that trivialisation and political short termism makes it difficult to rise to this challenge.
What we are left with is a US that is more isolationist, a Western European construct that may not survive the challenges of the next 30 years, a United Kingdom diminished in economic and political power that faces the prospect of internal rupture, and growing self-confidence in ideologies and systems that run counter to liberal democracy.
Clearly, these are long-term trends. So, what is the relevance of this today? I think it means a lot more bumps in the road, the need to spread risk across financial assets, a greater willingness to challenge market assumptions based on the continuation of the status quo, and a move away from simplistic box ticking ESG approaches to a much more nuanced assessment of risk i.e., more emphasis on transitions than exclusions. Energy security is going to rise up the agenda.
Conversely, we cannot ignore the fundamental shift in economic and political power. There will need to be engagement and a recognition of different approaches – on all sides. This applies to markets as well – after all, what are presently termed emerging markets will be mainstream in 2050.
Government bonds and cash
Government markets surprised again last week. Just as the bears were in the ascendancy UK 10-year bond yields dropped by 17bps, ending below 1.4%. What caused this? Possibly concern about Ukraine, perhaps a feeling that markets were discounting too rapid a pace of tightening given the upcoming squeeze on the consumer. Inflation data surprised on the upside, with Consumer Price Index (CPI) at 5.5% and Retail Price Index (RPI) at 7.8%, both a bit higher than the assumed consensus. Could it be that investors were fearing worse?
UK retail sales for January came in at 1.9%, stronger than expected, although an already weak December reading was revised down further. Just how stark the Covid impact has been on spending patterns was shown by the Office for National Statistics (ONS): online shopping now accounts for 25% of retail sales.
Credit markets were relatively subdued. Sterling investment grade spreads widened by 3bps and high yield spreads were a tad wider for choice, which was a pretty good outcome given geopolitical tensions.
Interestingly, the Financial Times had a piece on life expectancy on Wednesday (a topic I covered recently) and highlighted an aspect I had neglected. Falling birth rates and lower life expectancy is going to save the taxpayer money – or should I say mitigate the required tax rise. We will need fewer schools and pay out less in pensions. Instead of projecting a population of 85m in 2080 the latest ONS forecast is 71m.
On the subject of demographic trends, Covid has certainly challenged business models and this was seen in the latest announcement from Dignity, the funeral company. Underlying operating profits for 2021 are expected to have fallen by about 10%, despite more funerals and cremations being undertaken. The company cited market disruption and government restrictions as a reason for the fall in profit.
What the future holds for life expectancy is unclear but it is possible that the next few years will see a mean reversion and, in consequence, the company has been in dialogue with bond holders to temporarily ease some restrictions in their outstanding bonds. We have worked closely with Dignity and their advisers and have agreed some waivers, in exchange for the company providing additional funds if earnings fall below a certain threshold. It is a good example of working together with an issuer to get a sensible solution, balancing the needs of all stakeholders. But we could only do this because our position was strong – weak covenants give bond holders no real power.
I promise not to cover life expectancy next week.
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