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An Investor’s Holiday Wish List

This time last year, my single wish for 2017 was that greater empathy would enter the human consciousness and become manifest in areas such as modernity, immigration and free trade.

Unfortunately, the capacity to shout the loudest, rather than to listen and respect the counter-viewpoint, has never been far from the surface during what has been an extra-ordinary year from a geopolitical perspective.

19 December 2017

Nevertheless, as the holiday season approaches once more, our thoughts again turn to wishes — what we wish for ourselves, our family and friends, and for the coming year. As investors we recognise, of course, that success stems from disciplined management, often tinged with contrarian scepticism. But, lest we be labelled Grinch, we, too, permit ourselves the odd wish at this time of year.

So here are three things that I, as an investor, wish for in 2018.

New normal

First, I wish for a continuation of the ‘new normal’, now better known as ‘goldilocks’. If investors are to enjoy another year of strong returns accompanied by restful nights (ie subdued volatility), then they should wish for more of the same. Above all that means steadily improving global growth absent an acceleration of inflation. More of the same would extend the cyclical improvements in profitability underpinning equity performance in emerging markets and Europe. Goldilocks for longer would also reinforce the secular rise in return on equity in Japan as well as the momentum behind global information technology. But if global growth falters or inflation accelerates — neither of which can be ruled out in 2018 — then returns will suffer and volatility will spike. Extrapolation is often an exercise in wishful thinking — perhaps this time our wishes will be fulfilled for a bit longer.

Acceleration of productivity

My second wish is for an acceleration of productivity. To paraphrase a Nobel Prize winning economist, modernity is apparent everywhere except in the productivity statistics. Despite the disruptive technologies in mobile telephony, internet retailing, transportation, energy, big data and elsewhere, labour, capital and total factor productivity growth rates have slumped in both developed and emerging economies. Or perhaps weak productivity reflects those disruptions, as workers and capital are made rapidly obsolete by new technologies in industries ranging from energy to retailing to finance. It also may be that the statisticians are missing a trick. But until productivity picks up it will be difficult to foresee a sustainable and more equitable rise in real household incomes. Productivity is the basis for an expanding pie, one which can be more easily divided. And it beats other ways to achieve income equality, which typically involve messy political interventions or labour strife. To be sure, the trend is encouraging — technological innovation ultimately leads to higher living standards, widely shared. But wishing it would happen a bit faster, given the social and political stresses unleashed by the populist backlash against inequality, is no bad thing to hope for in 2018.

Common sense

My third and final wish is for the restoration of common sense in politics. The political revolutions of 2016 (Brexit, Trump election) swung the pendulum in political economy away from the ‘Washington consensus’. The Washington consensus, which dominated post-war economic policy making, was based on a belief that if countries pursued sound macroeconomic policies, including fiscal responsibility and low inflation, opened themselves to trade, capital flows and immigration, committed themselves to global institutions that aimed to achieve common economic, financial, developmental and security objectives (EU, NAFTA, WTO, IMF, World Bank, UN, cooperative response to climate change), then global and national welfare would be enhanced. The populist backlash of recent years has dislodged belief in the Washington consensus and in its respective institutions. Yet their underlying rationale remains valid, namely that free markets, accompanied by prudent economic and regulatory policies, and shared global objectives, serve mankind best. If nothing else, the evidence is represented by the hundreds of millions lifted out of abject poverty since 1989 as China, India and other emerging economies have joined the global economy. Admittedly, it is ambitious to wish an instantaneous ‘back to the future’, but perhaps 2018 will be the year the pendulum begins is swing back in the direction of orthodox sanity.

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