The arrival of spring means the start of a new financial year. With that in mind, here is a quick guide to the key points for investors.
There will be an increased push towards electrification
Many countries, including the UK, have recently been pushing hard to replace fossil fuels with electricity. Officially, the main reason for this has been concerns about climate change. Unofficially, concerns about the supply of oil and gas may also have played a role.
Europe, in particular, is heavily dependent on Russia for its gas. While the arrival of the warmer weather should reduce the demand for heating, gas is still used for many other purposes. These include cooling, power and manufacturing. Gas is required for products such as fertiliser, antifreeze, plastics, pharmaceuticals, fabrics and many chemicals.
This means that any shortage of gas, even in summer, could have serious consequences throughout numerous business sectors. These will come at a time when the world in general is still righting itself after COVID19. The UK is also still dealing with Brexit. In short, it seems almost inevitable that the world will see a period of high inflation.
Interest rates look set to rise
When inflation goes below target, central banks can choose between lowering interest rates and quantitative easing. They may even use a combination of both. When inflation goes above target, however, central banks can only rein it in by increasing interest rates. The only other alternative is for them to grit their teeth and ride it out.
Keeping calm and carrying on may be a feasible option if inflation is only slightly above target and/or appears to be only temporary. Under current circumstances, however, it’s hard to see how central banks can avoid raising interest rates. They may go as slowly and gently as they can but those with debts will feel the squeeze.
Payment systems will come under closer scrutiny
Currently, the U.S. effectively controls the major global payment systems. Visa, Mastercard, American Express and PayPal are all headquartered there. SWIFT is based in Belgium but the U.S. is a key member of it. The U.S. also has great influence with other key members, including, and arguably especially, the EU.
All of these networks have withdrawn from Russia. This may hurt Russia in the short term but may hurt the payments systems more in the long term. In fact, it may even cause serious long-term disruption to global trade.
Just as Europe is motivated to break its dependence on Russian gas so Russia is motivated to break its dependence on U.S.-controlled payment systems. In the short term, it may move to China Union Pay but this may just exchange one problem for another potential problem. It may therefore look to create its own alternative.
If Russia (and possibly China) move to break away from established systems, then the global payment network is likely to fragment. In principle, it could be replaced by decentralised cryptocurrencies. In practice, governments around the world are increasingly regulating cryptocurrency.
Sanctions will bite global brands
Many global brands have recently been forced to pull out of Russia due to sanctions and/or public pressure. At a minimum, this will hurt them in the short term. At worst, it could do them long-term damage in Russia and beyond. Even if they are eventually allowed to return, they may not be welcomed with open arms.
Remote-/hybrid-work will continue to grow
Even though the move to electrification is already underway, the world is not going to pivot to it overnight. Remote-/hybrid-work is therefore likely to be used as a way to deal with fuel shortages and corresponding high prices. Once it is fully integrated into everyday business life, it is very unlikely to disappear.
If you’re concerned about your existing investments or require wealth management advice, please do get in touch.