Over the past few days, the local foreign exchange market has been in an uproar, with investors wondering whether the Bank of Israel will begin intervening and sell off dollars from its huge reserves. Amidst the tumult, the CEO of one of the UK’s largest asset management firms, Schroders, landed in Israel.
Peter Harrison, CEO of British asset management company Schroders, which has $1 trillion under management, arrived for a round of meetings with the senior managers of financial institutions in Israel. Harrison spoke to “Globes” about investing in uncertain times, and noted the new-old economic surprise rising in the Far East: China.
“More volatility and more challenges for the markets”
During this stay, Harrison heard about the judicial reform, the political upheaval it has created, and has plenty to say on the subject. However, he prefers to focus on investment recommendations “adapted to the turbulent period in the markets”, as he puts it.
We met Harrison at the offices of a prestigious law firm in north Tel Aviv, shortly before he boarded his flight (he emphasized that it was not a private plane) back to London, where Schroders is headquartered. It turns out that he is concerned about “sticky inflation” which he believes will not go away any time soon, and share prices that are still inflated, even after last year’s declines. On the other hand, he says, investors can find solid, safe solutions that provide a high single-digit annual return, something that was not possible until a year ago.
“We are deep in inflation, and it’s happening all over the world,” is how Harrison opens the conversation. “When we consider the state of the economy today, we hope that the rate at which prices rise will revert to where it was before Covid. But it’s hard to see that happening today. Inflation will probably be higher and last longer, and so interest rates will remain high.
“We forget that the stock market experienced a gradual decline last year, there weren’t many ‘scary’ bear market days where we saw sharp declines. That’s something I think we can expect to happen more this year: more volatility and more challenges for the markets.”
What are the important economic challenges in the global arena, in your opinion?
“China,” Harrison replies. “China is going to be a leading and significant factor in the world economy. Its growth after its recent emergence from the Covid restrictions is enormous.
“You must understand that about 80% of China’s citizens had Covid. All this time that they were in lockdown, they accrued capital, and now they will have to take it out and spend it. In China, there is record spending at weekends, when people go out to enjoy themselves. We’ve heard of restaurants with waiting lines of a thousand people. This sort of behavior will have an effect on the global market by way of price rises, and certainly on the behavior of the central banks.
“The second challenge that I predict is going to be difficult to deal with is how ‘sticky’ inflation is going to be. There are many factors that affect inflation, but among those that can make it stickier is the shortage of workers.”
He jokingly says that, “In every country I’ve visited, I don’t know where everyone has gone, but there’s a labor shortage. The effect of factors such as the decrease in online shopping and, of course, the end of the supply chain crisis, is already over. When you calculate these factors, I think the expectation of a return to inflation in the 2-3% range is unrealistic.”
The past year brought with it a war in Ukraine and a spike in commodity prices. What are the trends for 2023?
“We’re seeing a rise in nationalism and de-globalization everywhere. This is a long-term process in which countries are becoming more inward looking, and this process reduces growth and encourages inflation.”
“Judicial reform is arousing interest around the world”
During Harrison’s visit, the first reading of a portion of the judicial reforms was passed, amid protests and warnings that this would lead investors to withdraw funds from Israel.
As an outside observer, what do you think of the internal division in Israel today over the judicial system reform?
“This cerainly arouses interest and the world is watching and following. The tensions and fears we hear are a very interesting topic, since your economy is in excellent condition, and the question that arises is: where is what’s happening here coming from.”
In commenting on the recent turmoil in the domestic foreign exchange market, and fears of investor flight, Harrison describes the sharp, rapid upheaval experienced by the British economy during the short period of the Liz Truss government. Truss was appointed prime minister last September and resigned the following month, after promoting a sweeping economic program of tax cuts. In response, the pound fell and government bond yields soared.
“In Britain, the market reacted very quickly to Prime Minister Truss’s attempt to produce both lower taxes, and an increase in government energy subsidies. In my opinion, Truss’s attempt was a step in the wrong direction. After the reform failed, and thanks to smart regulations and strategies, Britain managed to extricate itself from this mistake.
“I think Britain has learned the hard way that countries must spend what they can afford, and no more than that. Of course, the market is the factor that actually caused the collapse of the Truss move, and ultimately the collapse of her government. My point is that the substantial thing that you must pay attention to is where the money is going. If you see capital flight out of a country, that’s an important sign, it’s a warning like a canary in a coal mine. In this way, the foreign exchange market is an indicator of the economy’s direction.”
Do you see capital flight from Israel today?
“What’s interesting about situations like this is that usually capital flight happens quietly. These decisions are made inside the house. You just won’t hear about it, because it’s conducted in conversations within households.”
Maybe in Britain. Things here are very different, everyone talks about it.
“Yes, you have two things that occur here: people who are very vocal about the matter publicly, and then there’s what I said happens in private, that you don’t hear about. Therefore, currency market fluctuations are very relevant, and you must pay attention to what is happening in the foreign exchange market in Israel. In Britain, what happened with the exchange rate is what led to the fall of the government.”
How would you advise local investors to invest in these uncertain times?
“I think that in uncertain times such as now, fixed interest investments in the US offer a higher return. The stock market is expensive, and that is because there are many technology stocks that are priced according to long-term forecasts, but in situations of high interest rates, those technology stocks are going to be worth much less. When you think about it, you realize that raising capital is going to be far tougher in the near future, so in terms of investments, this direction will be more difficult.”
“The financial sector will continue to be preferred”
Which industries do you think will be the leaders in the coming year?
“First of all, the financial sector will continue to be given preferential weight in investment portfolios in 2023. There are a lot of accrued savings. Another sector is fossil fuels and the entire suite of products accompanying them. This despite the fact that operating costs in this sector have climbed slightly. It’s important to mention China again. As soon as the citizens there are released from the strict Covid lockdowns and move about freely once more, they will demand and consume resources, and boost the value of fossil fuels”.
Which sector is less attractive for investment, in your opinion?
“I think the technology sector will face great uncertainty going forward. We look at the costs presented to us by SaaS [software as a service] companies and they are very inflated in the current market. The market will have to be more sensitive to costs and will have to price products in a more balanced way, and this will, of course, lower market capitalizations for companies. Also, investment in the private consumer goods market should be meticulously scrutinized. It seems to be in good shape at the moment, especially thanks to rising prices, but purchase volume is decreasing.
“Lastly, inflation will lower purchase volume, and real wage levels will decrease, so if it isn’t health insurance or a staple product that most people won’t want to do without, I expect a general decline in this market.”
When do you think interest rates will drop?
“I don’t understand where the comments about lowering interest rates are coming from, and I don’t see interest rates going down anytime soon. I grew up in the 1970s, and those were times when inflation was very high. Interest rates were at 7-9% then. We are, of course, in other times, but inflation is high in many countries in the world. I think we are at a very early stage, and there is no room to talk about lowering interest rates.”
In your meetings in Israel, did you get any interesting investment ideas?
“I meet a lot of clever people here, who are growth-minded, and I meet very creative people all over the world. A lot of the innovations I heard about in Israel were about sustainability, and I didn’t think I would hear much about that here. The strength that exists here in technology and science is also very interesting. Much of what I did 20 years ago, is almost completely computerized today. We see that the amount of information we need to analyze today is massive, and we see a tectonic shift in directions of thought and adaptation, which I certainly see here in Israel.
“As I see it, artificial intelligence will be a major disruptive factor, and we still don’t understand to what extent. When I add this to the potential of blockchain technologies — and I do think that in the future we will see some kind of combination of these technologies — the ability to produce personalized preferences and personal creation will be amazing, and clearly it will be interesting.”
Published by Globes, Israel business news – en.globes.co.il – on March 5, 2023.
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