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2020 Investment views

2020 will bring inflationary boom, not recessionary bust

11 November 2019
Author: Alastair MundyHead of Value

Key Takeaways

  • Investors always prefer certainty, so the Brexit uncertainty has knocked them for six.
  • Perhaps, replace the word ‘Brexit’ with ‘recession’; we have seen recessions before, and we know they are reasonably short and the growth periods around them much longer.
  • The importance of the US election, especially the likelihood of a Democratic winner, and particularly Elizabeth Warren, is completely understated by investors.
  • Investors fear the Japanification of western economies, i.e. low interest rate, inflation rates and economic growth for elongated periods; we believe that policymakers will do whatever it takes to avoid Japanification and consequently think there is a significant risk of bond yields and inflation moving higher.
  • Contrary to the consensus, we are positioned for an inflationary outcome, not a recession.


Q&A with Alastair Mundy on


Events like Brexit create volatility, which creates opportunities. Alastair offers his view on why investors should prepare for an inflationary boom, not recessionary bust.

Q So, Alastair, let’s talk about Brexit. Over the past year it must have presented extraordinary challenges, but also opportunities?

I think the main challenge is that events like this paralyse investors. Investors are always desperate for certainty and uncertainty really knocks them for six. Consequently, they either don’t do anything at all or they sell anything where they see too much uncertainty – that can be certain sectors and certain stocks. So yes, it has given us opportunities. I always think anything which creates volatility creates opportunities – as simple as that.

I replace the word Brexit with recession because there is too much political emotion in the B word. We have seen recessions before, and we know they are reasonably short and the growth periods around them are much longer. The important thing for us when we are looking at companies and sectors is whether these companies make it through a recession and do they look cheap on a more normalised economic backdrop? That is really the way we have been looking at it.

Q Let’s look at the 2020 scenario. From an investment perspective, how do you see it when it comes to risks and opportunities?

For me, I think perhaps the UK election might not be nearly as important as the US election, where I think the likelihood of a Democratic winner, and particularly Elizabeth Warren, is completely understated by investors. Investors don’t seem to have moved onto that at all.

I think, in both the UK elections and the US elections, we will see promises of a spend fest by both sides of this electoral community. The winner may be the party that convinces most people it can deliver and afford its promises. Governments haven’t necessarily got this money to spend and they won’t be promising any tax increases to pay for this. I think the implications of these elections are increased government spending, increased government debt and therefore an oversupply of bonds and I really don’t think this is being focussed on enough by investors.

Q Let’s look forward to the way that you are positioning your strategy for 2020.

Given consensual fears of the Japanification of western economies, i.e. low interest rates, inflation rates and economic growth for a number of years, we prefer to take a contrary position and believe there could be a significant risk of bond yields and inflation moving higher. Therefore, our portfolios are positioned for that.

We have equities which will benefit from upwardly sloping yield curves, i.e. longer-dated bonds having higher yields than short-dated bonds. That would be good for financials and we also own precious metals. We have gold and silver exposures because we think that central bankers and perhaps the politicians are going to decide to take a risk with inflation – allow inflation to ‘run hot’ to try and revive economic growth.

So rather than worrying about a recessionary bust, which is what I think a lot of investors are talking about, we are concerned that we could end up with an inflationary boom. If that is correct, a lot of portfolios are completely incorrectly positioned.

Q That is quite a bold statement. Lots of people are saying that the stance that you have just taken is completely wrong and just let the momentum of 2019 and, indeed, 2018 continue, but you are being almost contrarian I would say.

As a contrarian, I think what has happened is everyone has become a recession-spotter and everyone is desperate to call, in particular, a US recession. But I think we are done with that. I think the question is how the authorities will react to the recession and I am suggesting they will react with fiscal policies. They have seen what happened in Japan and they don’t want a Japanese-like result so they will do everything they can and pull all sorts of clubs out of the bag to try and introduce inflation into the system. My belief is markets will either ultimately see that inflation as inflationary or it will actually be inflationary and that is bad for bonds.

All investments carry the risk of capital loss.

Alastair Mundy
Alastair Mundy Head of Value

Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, issued November 2019.

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