UK GDP shrank 2.9% in January, rather better than the 4.5%-5% contraction feared in the consensus estimate, bearing in mind not only the first full month of new Covid restrictions after Christmas but also the dislocation in the movement of imports and exports following Brexit on December 31st. The anecdotal ‘fast’ data, monitoring day-to-day consumer patterns (e.g., traffic congestion, credit card usage, electricity consumption etc) had suggested that Lockdown 3 would be less economically sensitive than its predecessors, and while a near 3% decline in normal circumstances would be a horror, it says much that it is a relative triumph of resilience when compared to the 20% economic decline recorded in April 2020.
Andrew Bailey, Governor of the Bank of England, still believes the economic outlook is good (the Bank’s “coiled spring”) but speaking at a symposium this week, he said that he would need to see evidence of prolonged excess inflation above 2% to require interest rates to be raised to cool any potential heat. In the meantime, he is still preparing the implementation of negative interest rates should the economy falter again. Among many mixed messages here, and despite markets’ scepticism reflected in higher bond yields (and therefore more expensive financing costs), he is effectively saying “I have all bases covered, and until anyone says otherwise, I propose to do nothing”.
The ECB, on the other hand, has broken ranks with the US Federal Reserve and the Bank of England and has responded to the challenge of rising bond yields (or more accurately, less negative yields in the case of Germany and Holland) and borrowing costs in the eurozone: it pledged to step up its QE programme with yet more incremental bond purchases on the simple premise that if demand exceeds supply, prices will rise and yields will fall. For the first time in two months eurozone yields have responded by moving in the opposite direction to their Anglo-Saxon counterparts.
The geopolitical risks of decarbonisation
As US Congress passes President Biden’s $1.9 billion Covid-recovery package, on top of the equally massive programmes implemented last year under Donald Trump’s administration, the political and fiscal spotlight is falling on the budgets of those departments which can be used to help fund such expenditure while relieving the pressure on government finances. Much the same is happening here in the UK, and in both instances defence spending is in the rifle crosshairs. As a barometer of the passion the subject excites, Bernie Sanders’ senate performance a few days ago was instructive: on full tub-thumping form, he made the social case for slashing defence dollars to “feed our people, put clothes on the backs of poor Americans”, to help realise their “expectations of, their right to, a better standard of living and higher wages!”. With Biden more understatedly making much the same case, the Chair of the Senate Budget Committee is clearly pushing on an open door among the Democrat leadership.
In the UK, Boris’s announcement in December of an additional £16 billion of spending on cyber and space defence comes at a price, largely thanks to the £17 billion ‘black hole’ in the MoD accounts. Robbing Peter to pay Paul, hence yet another Treasury-led defence review in the offing and a suggested reduction in the establishment of the Army from 82,000 to 72,000 (not quite enough soldiers to fill Old Trafford, let alone Wembley).
Why is this of relevance? Defence strategists are pointing to the opportunities and threats arising from the global decarbonisation programme. As the ice caps shrink at both poles thanks to global warming, Greenland and the Antarctic become viable for mining, being rich in the rare-earth minerals and ores increasingly in demand as the digital and decarbonisation revolutions gather pace. Not only those landmasses: it has also been suggested that mining the seabed in the deep, deep ocean, particularly in regions of high tectonic and volcanic activity where those same ores and minerals abound, is now a commercial possibility. And returning to the far north, as the pack ice retreats and becomes less enduring, so there is the possibility of year-round trans-polar maritime routes. The US, China and Russia are all sizing up the opportunities and the threats, each keeping a beady eye on the others’ movements, reading the signals of intent. Both China and Russia are investing heavily in naval capabilities (China now has the largest navy in the world, though lags well behind the US in aircraft carriers) and, while nobody is predicting a hot war, the potential for diplomatic or military stand-offs over strategic maritime assets is only likely to grow. While many treated Donald Trump’s unsubtle overtures to ‘buy’ Greenland from Denmark as a joke, in reality he was deadly serious. In the North Atlantic, Denmark becomes a key strategic player through its ownership of both Greenland and the Faeroe Islands, the latter already becoming one of the most secretive and sensitive of NATO’s watching and listening posts, keeping tabs on both the Russians and Chinese.
From an investment standpoint, while peripheral to current events and pre-occupations, however glacially and imperceptibly, these new and growing risks will be factored into longer-term risk premia.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Fund specific risks
The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.