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Investing in a risky world

Despite apparent progress made in peace talks this week and a promise of reduced military attacks by Russia in Ukraine, doubts remain about Russia's true intentions and whether it will keep its word. An end to the war is not in sight, and investors remain very much at the mercy of instability and volatility with the winds of change and discontent blowing strong. 

Thanks to the pandemic, economies have lost around two years of growth and are still playing catch-up. New patterns of behaviour, and rising levels of disruption from Covid – something I experienced through cancelled trains and tortuously slow airport security checks last weekend – continue to cause ripples. 

Then there’s inflation. From a small flame that had central banks concerned but not alarmed several months ago, inflation has roared into life. Whatever your own views on inflation and whichever camp you stand in, we can all agree that it has become a major problem and is being fanned further by the winds of war. Bank of England chief Andrew Bailey warned this week that the invasion had raised the risk that we could be moving into a period of stagflation.

The cure for inflation means reduced liquidity in markets and a tightening cycle of interest rates, with all the risks that entails for consumer spending, and costlier borrowing. On its own, that would be bad enough but rates are creeping up in tandem with tax rises designed to help the government clear its pandemic debt and spend more on healthcare. 

Inflation is not the only issue. The UK stock market has lain in the shadow of Brexit for the past six years while poor trade performance in the wake of the pandemic is being blamed on our exit from the EU, and now just ahead of the introduction of full checks on EU goods coming into the UK, government ministers are discussing delaying this step for fear of making supply chain problems worse. UK exporters to the EU have in the meantime had to bear additional Brexit-related costs and friction. 

Meanwhile, the geopolitical situation could mark the turning point for globalisation as companies and governments rethink where they source supplies from in order to avoid the supply chain shocks of the past two years (3D printing can help here, as Arthur Sants explored in his recent article 'Pandemic provides inflection point for 3D printing'). 

Climate change is another major trend with the capacity to trigger economic shocks. Although reducing CO2 emissions drastically by 2050 at the latest is the stated target for most of the world, that transition is likely to be accelerated due to mounting public concern and the need to improve energy security. 

We also have wealth and generational inequality, while the certainties of recent years – that you could rely on growth companies and tech stocks in particular, and on lovely loose monetary policies – are being overturned. 

The point here is not to discourage anyone from being in the market. Investing can sometimes be easy, but it isn’t always. Without risks there are no rewards or opportunities. Even in relation to tech, despite the current rough times for the sector, there are ample reasons to have exposure. Chief among them being that this is where sustained, and unlimited, growth over the long term remains on offer, as Robin Hardy explored in his recent article, a theme he picks up again this week. 

But while the goals of zero Covid, zero conflict, zero inequality, zero emissions and low inflation remain out of reach, and our portfolios are bobbing along on rougher seas than normal, it's worth taking the time to assess strategies and understand the risks we are taking. This is the issue that James Norrington examines in our cover feature this week as he focuses on the changes that may lie ahead and the implications for investors. In next week's magazine, we'll be looking at the issue of inflation and how investors can protect themselves from its worst effects.