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From Reflation to Inflation February 12Th 2021 the 2020 Journey

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From Reflation to Inflation February 12Th 2021 the 2020 Journey From Reflation to Inflation February 12th 2021 The 2020 Journey • Start of 2020 – World was set to recover from the “trade war years”. Portfolio positioning was for a world of moderate economic growth. • Coronavirus Pandemic: We decided that this was not the great depression but a bridge to a more inflationary world. • Performance recovered strongly towards the end of the year as the World started to look post Covid and our contrarian view of a more inflationary world started to become more mainstream. 2 The Battle of 2020 Deflationary Shock Versus Inflationary Response 3 Big shocks can change Markets for decades • Global Financial Crisis • Post Pandemic ▪ Austerity • Austerity is Dead ▪ Money Supply didn’t reach main • Focus is on getting money to main street street ▪ Asset bubbles favoured Wall • Different assets will work for the next Street decade ▪ Low Inflation • Inflation is being encouraged ▪ US Dominance • US Dominance is under threat 4 The Bull Markets of the last decade may be over: 16000 14000 Deflation Assets: 12000 ❑ Government Bonds 10000 ❑ US Investment Grade ❑ US High Yield 8000 ❑ S+P 500 6000 ❑ US Growth Stocks ❑ US Consumer Discretionary 4000 Stocks 2000 Inflation Assets: 0 ❑ Commodities ❑ Real Estate 01/01/1980 01/01/1981 01/01/1982 01/01/1983 01/01/1984 01/01/1985 01/01/1986 01/01/1987 01/01/1988 01/01/1989 01/01/1990 01/01/1991 01/01/1992 01/01/1993 01/01/1994 01/01/1995 01/01/1996 01/01/1997 01/01/1998 01/01/1999 01/01/2000 01/01/2001 01/01/2002 01/01/2003 01/01/2004 01/01/2005 01/01/2006 01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018 01/01/2019 01/01/2020 Appian Inflationary Basket Appian Disinflationary Basket ❑ TIPS ❑ Equities in World ex US Source: Refinitiv Datastream 1/12/2020 ❑ US Banks ❑ Value New Ones will Emerge ❑ Cash 5 Could this unravel the biggest Bubble of all: Passive Management? ➢ Passive has meant buying more Fixed Income, more Growth Equities and more US exposure. ➢ The remaining active managers are free to seize Source: Moneycube 1/12/2020 the opportunities 6 COVID likely to mark bottom in Yields after 40 year Bull Market: Source: Refinitiv Datastream 1/12/2020 7 Beginning of Multi Year Trend? MSCI Growth Versus MSCI Value since 2000 Plenty of opportunity left for Switch back into Value Source: Refinitiv Datastream 1/12/2020 8 Multi Asset Funds are Performing: 3 Month Performance November to January 9 Equity Funds are Performing: 3 Month Performance November to January 10 How We View Todays Investment World ➢ In an inflationary world, 0 is not protection of capital. ➢ Capital cannot be protected trough traditional fixed income buffers ➢ The race for safety has meant that the “safe assets” are now the most risky. ➢ Valuations matter and the starting valuations today for fixed income and US equities make them risky. ➢ Illiquid assets are attractive to some due to correlation benefits but are not a panacea. ➢ Risk is the permanent loss of capital. ➢ An investment process focused on long term investments, quality assets and sensible valuations. 11 Polite Notice Re GDPR Requirements By attending this presentation we are assuming your permission for Appian to contact you in the future. If you would rather not please let us know on the contact details provided [email protected] +353 (1) 6623982 [email protected] +353 (1) 6624053 [email protected] +353 (1) 6623986 [email protected] +353 (87) 1806784 [email protected] +353 (1) 6623001 Disclaimer Warning • If you invest in any of the funds you may lose some or all of the money you invest • Past performance is not a reliable guide to future performance • Appian Funds may be affected by changes in currency exchange rates • The value of your investment may go down as well as up Please note that any target return noted in this material is not guaranteed. The Appian Multi-Asset Fund, Appian Impact Fund, Appian Global Dividend Growth Fund, Appian Global Small Companies Fund and the Appian Euro Liquidity Fund are Retail Investment Alternative Investment Funds and are sub-funds of the Appian Unit Trust. The Appian Burlington Property Fund is a limited Liquidity fund and is only open to Qualifying Investors. A minimum investment threshold of €100,000 applies. Redemptions are at the discretion of the directors and minimum investment term prior to any redemption request being considered is two years from investment. Further information in relation to all risks for each fund is provided in the relevant Fund Prospectus and supplements available on request. The information contained in this material is not financial advice. Nor does it constitute an offer for the purchase or sale of any financial instruments, trading strategy, product or service. No one receiving this material should treat any of its contents as constituting advice. It does not take into account the investment objectives, knowledge, experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to investing or taking out any product from your own independent adviser. This material has been prepared and issued by Appian Asset Management Limited on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been given to the preparation of the information, no warranties or representation, express or implied are given or liability accepted by Appian Asset Management Limited or its affiliates or any directors or employees in relation to the accuracy, fairness or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. The above disclaimer and limitations of liability are applicable to the fullest extent permitted by law, whether in Contract, Statute, Tort (including without limitation, negligence) or otherwise. Appian Asset Management Limited is regulated by the Central Bank of Ireland. 14 From reflation to inflation February 2021 Julien Garran +44 207 627 0635 [email protected] 15 Risk & regime change This presentation argues that the current regime change in the US and in the global policy mix, from anti-inflationary monetary dominance over the past 40 years, to pro-inflationary fiscal dominance and monetary accommodation, will rewire the concept of risk in global financial markets. Over the past 40 years, monetary and fiscal policy tightening into a recovery choked off US$ flows offshore, and left markets largely in a disinflationary boom during the expansion, with a risk of a deflationary bust if liquidity tightened excessively. The fundamental implication of the current policy regime change is that it will drive sustained trade and financial flows offshore though the cycle. This means that markets will spend most of the time in the top half of the MacroStrategy investment clock. The opportunity to trade a sustained reflationary boom has emerged, but so has a new risk; inflation. Capital Flows Investment theme Investment clock Miners, Large XS credit commods Large XS credit Zone 1 Zone 2 Ind commods While wages EM stocks Capital flows Reflationary Inflationary But not miners are accelerating Short 10yr, into EM boom bust Short treasuries Induces inflation Short US$ Credit Shortfall Small XS Credit Short US stocks Tech, Pharma, Zone 4 US spreads No more flows Zone 3 Short High yield Biotech, Deflationary widen. into EM Disinflationary Long gold Long US$ bust Deflation boom Long 10yr Long 10yr follows. 16 Sources; The MacroStrategy Partnership Dollar flows are the key to global reflation #1 • Dollar flows from the US offshore, that fund the supply chains that feed global trade, are the key driver of global reflation. • There are two types; capital/financial flows, and trade flows. • The reason dollar flows are critical is that there are two US$ economies. The second US$ economy, in US$trn 12 10 Offshore US$ 8 denominated credit 6 Weighted 4 basket peg Bank 2 loans Full peg 0 US$ cash circulating abroad Pegged currencies US$ liabilities held offshore Sources; BIS, The MacroStrategy Partnership 17 Dollar flows are the key to global reflation #2 • We use our global excess dollar liquidity indicator as a signal for the incentive for capital to flow out of the US. 30 Excess global US$ money supply, 6m ann, % 25 Debt ceiling raised 20 QE1 QE2 Reflationary 15 10 5 Now 0 -5 -10 Fed tapers Shanghai -15 Treasury draws down Deflationary -20 accord deposits at Fed Sources; The MacroStrategy Partnership 18 Inflation in the next cycle? No one thing causes inflation. Instead, inflationary eras describe a self-reinforcing process combining major supply shocks, government driven demand shocks, and a Fed that is prepared to accommodate both with easy money. And it is the interaction of those forces with consumers’, workers’ and producers’ psychology that drives inflation. These factors are starting to fall into place. In ‘The road to inflation’ I highlight the ‘Seven Supply Shocks’ that are currently impacting the global economy; asset prices, oil, the end of Moore’s law, monopoly, green policies, deglobalisation, and a deteriorating human & physical capital stock. The four demand shocks are; a global consensus towards across-the-cycle fiscal stimulus, rising militarisation and a growing welfare & dependency culture and now the lockdowns. The elephant chart; global income growth, 1988-2008 90 Income growth Global high 80 '88-08, % income earners see strong growth 70 60 50 40 The decline of the The rise of the emerging developed world 30 middle class, especially China middle class 20 10 0 -10 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Poorest Percentile of world income distribution Richest 19 Sources; The MacroStrategy Partnership, Bloomberg.
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