Summary

'Society remains conditioned by satisfaction not sacrifice'. In this strategy masterclass David Roche outlined how when confronted with a crisis global governments and central banks will continue to take the easy way out by printing money and expanding fiscal deficits. For the time being the tightening in credit conditions will cancel out the additional money printing by the Fed but the issues in the banking sector will ultimately be resolved by de facto deposit guarantees in both the US and Europe. This represents 'the continuation of moral hazard along an exponential curve'. Further out the resolve of central banks to squeeze inflation down to the mandated targets will give way to fudge and fiddle' given the massive increase in debt which has taken place over recent years from 200% of global GDP at the time of the GFC to 250% now and the inability of political systems to withstand pain. Accordingly, inflation will settle at around 4-5%, given zero productivity growth and record high levels of unemployment. The BOJ under Kazuo Ueda will most likely prove an exception however, ending yield curve control and money printing by late Summer injecting some excitement into markets with JGB yields rising to around 1.35 to 1.50 and the yen appreciating to 1.10 versus the US dollar. Beyond Japan, markets are likely to be relatively range bound over the near term against the backdrop of slowing economic growth and a possible recession in the US with property as a potential casualty given the demise of leverage-based strategies. Investors should adopt relatively conservative asset allocation strategies with bonds less unattractive than other assets with the potential to generate returns of 6-7% with a mix of sovereign and corporate credit. In the equity space David recommends sustainable yield but remains sceptical about the technology sector for the time being at least and prefers stocks that have solid cashflows and low multiples. There was a lively Q&A around the outlook for commodities. David is bullish on grains because of the longer-term imbalance between supply and demand while Russia is getting more desperate and will likely walk out of the Black Sea Agreement. David shares the widespread disappointment with gold's relatively lacklustre performance but prefers gold to crypto which he believes has some way to go in order to gain more widespread acceptance as an alternative to fiat currencies. David is bearish against the consensus on the outlook for copper as he believes that the transition to phasing out petrol driven vehicles will be delayed for political and cost reasons and that much more of the world's growth will be concentrated in areas that do not use industrial metals. Finally, oil and geopolitics is an area of real expertise for Independent Strategy and what David calls the New World Disorder is here to stay. The implications are generally negative for emerging market equities as international investment and trade will come under increasing pressure and whilst the USD is likely to weaken this will not be of a sufficient magnitude to enable EM central banks to cut rates to any significant extent. Further out, China and her allies could remove Saudi from the West's orbit and any such agreement would be far more threatening to the West than Xi Jinping's lacklustre support for Russia against the Ukraine, as it would likely mean the West paying more for oil and China being able to access lower prices.

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