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The return of the patient investor

Wednesday 8th April 2015

Written by Michael Stanes

In a recent speech, the Chief Economist of the Bank of England, Andrew Haldane, raises the question as to whether the global economy is sitting at the cusp of a period of secular innovation (the optimist view) or secular stagnation (the pessimist view).  
 
He explores the annals of history to show that human society has been accustomed to longer periods of slow growth; fast growth is a relatively modern phenomenon brought on by the Industrial Revolution in 1750. Over the last two centuries, advanced economies experienced a period of immense secular innovation where growth has averaged 1.5% per annum, each generation one-third better off than the previous. In the three millennia preceding the Industrial Revolution (yes, he goes that far back!), global living standards were broadly flat.  According to Haldane, “If the history of growth were a human 24-hour clock, 99% would come in the last 20 seconds.”
 
Haldane does not state which side of the debate he falls upon (the optimist or pessimist), but highlights that economic growth has benefitted from periods of slow growth. For example, Haldane likens the period from the invention of the printing press in the 15th century to the Industrial Revolution as one which potentially sowed the seeds for the transformational period post-1750 as literacy rates improved. Growth, therefore, is derived from multiple sources, not solely attributed to technological innovation but also has sociological roots through education, culture and institutions. 
 
Post-2008, we are arguably in a period where the seeds are being sown for the next big secular innovation. But because we have become used to fast growth, Haldane warns that the human virtue of patience is being reduced which could be growth restraining. In other words, our increasing focus on the short-term makes for bad decisions. UK companies are spending less on research and development to boost short-term profitability; there is less investment in infrastructure (public investment relative to GDP has been in decline since 1970 in the UK); while the average holding period of assets have fallen tenfold since 1950.
 
The above might seem esoteric. However, the arguments raised by Haldane show the policy dilemmas facing governments and central banks in a low growth/low rate environment in avoiding stagnation and stimulating innovation. Advanced economies need to address structural issues, such as high debt burdens and rising income inequalities to boost growth, at the same time as navigating through a period of negative real rates (in a growing number of countries) to encourage savers to spend. Unlike in 2008, emerging economies are not positioned to absorb the slack from advanced economies; a trend accentuated by the strong march of the US dollar since mid-2014. 
 
With structural economic headwinds remaining unresolved, this has important repercussions for financial markets, where investors are increasingly challenged in their search for income and return. We have been through a six-year bull market, which has been increasingly driven by the momentum trade of late, particularly in the US.  
 
The current environment warrants the return of the patient investor, and Haldane’s analysis reminds us to search deeper for underlying trends and inflection points. Our view remains that we are in a normalising interest rate and growth environment and it is important to look through the short-term noise and uncertainty, but nonetheless cognisant of potential risks that may unfold along the way. 
 
* Michael Stanes is Investment Director at Heartwood Investment Management
 





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