The decoupling of global growth, the growing push for transparency, and an ESG about-turn
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
Monetary policy
Economic tremors from the conflict in Ukraine continue to rock financial markets, complicating what were already festering issues spanning inflation, supply chain resilience, the power of big tech, transparency, ESG and more.
In the broadest sense, the world's superpowers are now on a different economic footing. US President Joe Biden used his State of the Union speech yesterday to position fighting inflation as his top priority. Just last week the European Central Bank had been concerned that producers would begin passing higher costs onto consumers, but with war on its doorstep and an inevitable drop in sentiment around the corner, that looks unlikely.
This will lead to a "decoupling" in both growth and monetary policy, with the US pursuing normalisation and the ECB maintaining a loose approach. This is "nowhere near" being recognised by markets, argues Robin Brooks, chief economist at the Institute of International Finance. In a piece for the FT this morning, he sees a "big divergence" ahead, with much larger fiscal spending required in Europe and prolonged weakness of the euro against the dollar.
Transparency
Managing the risks and opportunities associated with the cross-border flow of money is a theme The Wealth Report has covered several time, and the current conflict has brought fresh impetus for action in this area. The UK government is, after some prompting, making progress by accelerating legislation to introduce a register of beneficial ownership of UK property.
This is an initiative that has been in the long grass for several years. Although identifying beneficial ownership is a prerequisite when a transaction takes place through a company, there is currently no public register of this information. Tom Bill considers the implications:
"Enhanced transparency rules around property ownership would reinforce the UK’s reputation for legal stability.
"The impact on trading volumes is unlikely to be significant. Buying through a company has become less popular in recent years because in addition to paying rising levels of ATED (annual tax on enveloped dwellings) and higher legal fees, there is no longer an inheritance tax benefit."
All this follows the closure of the tier 1 investor visa scheme last month. Have Golden Visas had their day? The direction of travel is clear, writes Flora Harley.
ESG
We discussed the risks associated with allowing markets rather than voters dictate what is and isn't good for society in last year's Wealth Report. The Ukraine crisis has brought the issue sharply to the fore. The EU is engaged in a multi-year process of developing a taxonomy - effectively a set of rules intended to define the rules around environmental, social and governance investing.
The Russian invasion of Ukraine has shone a harsh light on how hard that process is going to be. Bloomberg quotes Hans Christoph Atzpodien, who runs BDSV, a German defence industry lobby group:
"The invasion of Ukraine shows how important it is to have strong national defence... I appeal to the EU to recognize the defence industry as a positive contribution to ‘social sustainability’ under the ESG taxonomy."
A week ago, manufacturing weapons was frowned upon by markets, illustrated by the relatively higher cost of finance experienced by defence companies. Now, with western economies sending weapons to Ukraine, manufacturing them is no longer frowned upon. This is more than a wrinkle in the sheets, a report in this morning's Telegraph suggests that the UK government sees this as a national security issue:
"No 10 is planning to launch a charm offensive on behalf of military manufacturers amid fears ethical investing is posing a “fundamental risk to British sovereignty” in the wake of Russia’s assault on Ukraine.
"The Ministry of Defence and No 10 have begun discussions on how to support the defence industry as it comes under increasing pressure to avoid bidding for work managing nuclear weaponry and other defence resources from funds concerned about the ESG (ethical, social and governance) impact of their money."
The definition of what makes a company “good” is in flux.
Inflation in the UK
British shoppers were hit last month by the biggest price rises from major retailers since 2011, according to the latest survey from the British Retail Consortium. Prices rose by 1.8% in February, up from 1.5% a month earlier.
Looking further along the supply chain, it's easy to see inflation gathering pace. The cost of shipping or air freight will increase significantly as sanctions will impact on China-Europe rail freight that travels via the New Silk Road trade routes traversing Russia and Belarus, writes Claire Williams. Aside from supply chain issues and associated inflationary pressures, logistics operators also face labour market constraints and upward pressures on wages.
Bank of England rate-setter Michael Saunders - in the first speech by a BoE policymaker since the onset of the conflict - agrees the conflict will send inflation higher but it's unclear how that will impact policy.
“It’s not clear at this stage if those recent developments have any effects on the outlook for inflation two and three years out,” he said when questioned yesterday. In related news, a new index from Nationwide, published this morning, reveals that UK house prices climbed 12.6% during the year to February, marking the fastest annual growth rate since June last year.
In other news...
For complete coverage of The Wealth Report 2022, visit the site.
Elsewhere - UK public finances vulnerable to higher inflation, says Sunak (FT) and finally, war in Ukraine has investors thinking about a second cold war (NYT).