“Thus, technology is in itself deflationary,” he says.
The third factor to consider is the continued rise in the flexibility of production.
In a UK context, he says, this means that, as long as there is 10% unemployment in Europe, 5% unemployment in the UK will not be a worry from an inflation point of view.
“Central banks, in targeting inflation, are pushing against a door that has a bit of a spring on the other side,” he adds.
As a result, while he does believe both the Bank of England and the Federal Reserve have got into a position where they will have to raise rates, it will not be by much.
“The important thing is where we end up. Carney has spoken about rates ending lower than we have had before; rates will normalise at a lower level, and with inflation at a lower level than what we are used to.”
However, far from an extraordinary phase for the market, Marriott says this is a similar situation to one faced in the 19th century. “Across the century, prices were down, there was an industrial revolution and there was cheap labour coming from the countries to the towns.
“Mark Carney points out that, over that period, stock markets returned around 6%, with about four crashes.”
Seeking returns
In the current climate, Marriott says, equities can rise from here, which will give one a decent return for now, but longer term one should not expect an average return of 14%, rather more likely is a return of 6% or 7%, with higher volatility.
“So, in the long run, you need to be in and out of markets a lot more actively, trying to trade the difference, or you have to ride through it. My bias is to ride through the volatility and just trade the extremes,” he says, as was the case in August.
But, he adds: “In that sense your risk/return is less attractive, but with rates at 2% you need to be prepared to do that.”
This kind of market requires managers to be more on their toes, more selective on both the fund and the stock space, Marriott says. “You have to be careful about how you select your equities now because companies can’t just make money from inflation – they can’t just raise prices. You have to find companies with pricing power and the ability to provide products people want,” he says.
Such an environment provides opportunities but it also raises the risks.
“The biggest risk I have been worried about for three years, which hasn’t yet quite materialised, is liquidity in corporate bonds. And I would extend that liquidity risk to government bonds.
He adds: “Given what happened in August, there is perhaps reason to extend those concerns to short-term liquidity in equity markets.”
According to Scott, the key thing in the current market is to ensure the team is making real decisions at the extremes and actively managing the portfolios.
And given the heightened volatility Vestra is expecting, the ability to step back from the noise and take a breath is liable to be a useful one.
