The pandemic is still with us and continues to impinge on both global growth and inflation, and the return of great power politics will present further uncertainty, but opportunities remain.
It's all Greek to me
It can't be easy for the team at OMICRON – the Austrian company that supplies high-quality testing and diagnostic solutions for electrical assets – now that the World Health Organisation (WHO) has decided to name COVID-variants according to the letters of the Greek alphabet. Certainly, this latest mutation of the virus seems set to put a brake on our plans to travel and socialise; rights and freedoms have been abruptly withdrawn by governments all too comfortable with the exceptional powers that this global pandemic has conferred.
While tighter restrictions will inevitably damage growth – hampering the long-awaited recovery of the service and hospitality sectors in particular – we're unlikely to see the corrections to domestic and global GDP that occurred first time around. This time it's different. We remain an adaptable species. People and businesses have become more resilient not just to the virus, but to its second and third order effects. As we noted at the outset of the pandemic, there is some way to go before COVID-19 becomes an endemic disease, but there is less cause for alarm than there was. Especially if we can find the wit to think globally in the roll-out of vaccine solutions. And provided nations have the courage to exit the zero-COVID policy that seems an increasingly unrealistic strategy.
Inflation, an old friend
Recovery and continued fiscal stimulus have combined to fuel inflation numbers to levels long forgotten, and not just in the developed economies[i]. Indeed, estimating quite how long this will last will keep economists and market commentators busy for many months to come.
Lacking a crystal ball, I can only observe that I'm not so sure it really matters whether inflation endures or is temporary. The fact is inflationary pressure creates as much opportunity as it presents challenges to active managers like SKAGEN. High conviction but well diversified portfolios, where companies are known and engaged with, allow for risk to be embraced, and for higher inflation or even the threat of higher inflation to be a cue to investment opportunity.
Great power forces on capital markets
Despite periods of intra-month adjustment, capital markets remain mainly strong. SKAGEN's funds have mostly delivered positive absolute performance and both SKAGEN Global and SKAGEN Vekst are well ahead of their respective benchmarks – the former to a degree not seen for many years.
The emerging markets (EM) have been the laggards. At the beginning of the year, EM was the consensus bet for 2021 – which reinforces our dim view of the value of consensus in investing. As we end the year, some EM economies have greater reserves and depend less on overseas debt than they did, and some do not; but all are caught between a tightening US and a slowing China.
For more than a century, no US adversary (individual or collective) has ever achieved more than sixty percent of US GDP[ii]. China is the sole exception, and it is fast developing into a superpower that could rival the US. Its recent and more aggressive strategy presents a competing sphere of influence to US diplomatic and monetary policy. This will add complexity to the EM, and successful EM investing will increasingly demand a thorough grasp of company, sector, country, and regional particulars. This strongly favours active and engaged managers like SKAGEN and the potential upside in the SKAGEN Kon-Tiki portfolio is currently uncommonly high.
New Year's Conference
To help you take stock and assess your investment strategies, the SKAGEN New Year's Conference will occur on 11 January 2022. This annual event will again adopt a digital format on-line. We have assembled a top-rank group of speakers who will address the challenge of investing in the age of global transformation. You are warmly invited to attend and can register directly here.
Thank you for the tree
The gutter-press in Great Britain have made much of the state of the Trafalgar Square Christmas tree this year. This tree has been gifted annually since 1947 by the people of Norway as a token of gratitude for British support to Norway during the Second World War. It is said that the first tree was sent during the war as a gift to HM King Håkon VII, then in exile in Great Britain. Either way, the media have entirely missed the point of gift giving; it is not the nature of the gift that matters, it is its purpose. Oftentimes, as here, that purpose is appreciation. This is understood by the British people, and they are deeply thankful for the tree. I hope this lesson is one my children will remember come Julaften/Christmas day.
God Jul og Godt Nytt År
As we close in on Christmas, all of us in SKAGEN wish you and yours a very Happy Christmas and a prosperous New Year. Thank you for your continued trust in us.
[i] Global inflation stands at 5.5% as of 10 December 2021, according to Bloomberg
[ii] Taken from Rush Doshi; The Long Game – China's grand strategy to displace American order; OUP 2021