Monthly Market Outlook

It’s time to ditch the crystal ball

September 2022 (Click here to download)

The global economy is heading for recession, but second quarter earnings are up. An energy crisis will descend like falling leaves, but the sector is reporting bumper profits. In times like this, the only certainty is that nothing is certain.

We’ve spent the last few months hearing people talk about food inflation or energy inflation as though there are particular pockets of the economy that are predictably driving prices higher. While the Manager would expect these kinds of proclamations from politicians and reporters, it can be worrying to hear people who should be more clued in pointing to the same unsubstantiated reasons. There are always going to be some products that are in short supply and, for that reason, their prices will rise. But generally, to balance this, there are other things that go down in price as people spend on those more expensive items. You know you have inflation when nothing goes down in price — which is the scenario we find ourselves in now.

The reason for this, as the Manager has detailed before, is that the world economy has been artificially stimulated by easing measures gifted to us in the midst of the Covid crisis. Central Banks bought up bonds; they sent hefty cheques to taxpayers. Prices went up, and people could afford it. Now, country by country, recessions are being confirmed. But we’ve been here before, which is lending us a false sense of security: the public is beginning to mistakenly believe that the economic downturn will sort us out, slow consumption and, ultimately, curb inflation.

Consider this your reminder that this may not necessarily be true. You don’t get to double-digit inflation without something out of the ordinary, and the scope of government assistance as we exited the pandemic turned out to be anything but.

“The Inflation Reduction Act is probably going to raise inflation.”

Philip Smeaton
Chief Investment Officer


The latest estimate for UK inflation by 2023, according to Citigroup.

Source: Financial Times

Chart 1: Stimulus equals more money chasing fewer products

Source: Sanlam Private Wealth

So now, as we move into a slower economy, how will the government respond?

How do spending policies evolve from here? Politicians do love to spend and voters love free stuff. As long as there is a bogey man to blame the inflation on, even if Central Banks do weaken the inflation monster, government will be there to nurse it back to health. The US Senate has set forth a plan in its Inflation Reduction Act, but, historically speaking, estimates are almost always wrong — revenue raised falls short, and spending climbs too high.

By how much will policymakers undershoot their goals? How deep will the downturn be? The Manager can’t tell you. Has inflation peaked? Will a recession be the cure? All are valid questions, but the answers are unknowable. So, as always, we find ourselves investing in an environment of uncertainty — because things are always uncertain. No crystal ball has ever predicted the path of macroeconomics. Invest for the long term, stick to your plan and keep your head steady through the storm — brighter days have always returned.

Investment view: Why we have to keep mining

The clean energy conversion won’t happen overnight. To build a greener future, we’re going to have to get our hands dirty.

Energy has been the star of both stock markets and news stories this summer. The sector has consistently outperformed other assets in 2022, according to the S&P. This may sound like a good thing on paper, but on the other side of the coin is the pressure higher gas and energy prices are putting on consumers. As we sweat through one of Britain’s hottest summers to date, we are being warned of another record ready to be shattered: that of unprecedented heating and energy bills come the fast-approaching cooler weather. As of 26 August, household energy bills are predicted to reach £3,600 a year in 2023. But that number keeps creeping up, as does Ofgem’s energy-price cap.

The dramatic rise in temperatures, coupled with energy prices ready to burn holes in our wallets, is driving home the need to get the transition to green underway. Add to this the inability to depend on Russian oil and supply chains still jammed up from Covid complications, and it’s clear we need a better answer.

Luckily, one exists. But to make it work, we’ve got to dig our heels in — literally.

The world needs to mine more copper. In order to make emissions targets and render fossil fuels unnecessary, we’ve got to keep digging. While this might seem antithetical (the Manager acknowledges ‘mining’ has become a dirty word — pun intended — and with good reason given the dangers associated with it), it is a critical means to an end. And a shortage is coming: a July report from S&P Global highlighted that unless additional supplies are found, climate and energy targets will be “short-circuited and remain out of reach”.

Demand for the red metal is expected to double in the next decade because we need more metals and more mines to build a greener future. We need copper to make the wires that will run electric cars. In fact, electric vehicles use more than twice as much copper as their combustion-engine counterparts, and that’s not counting the copper plates needed in each individual charging station. Copper is also a critical component used to build solar and wind power plants, and to transport renewable energy.

While finding more copper is more complicated than it sounds, the Manager will continue to invest in mining because mining, perhaps unexpectedly, is what will ultimately drive the green economy. If the world wants to eliminate fossil fuels and reach net-zero emissions by 2050, we need more copper; we just don’t have enough of it at the moment. And those companies that are involved in providing this solution stand a chance of solving the world’s problems; hence, they can expect stronger pricing power and encouraging earnings over the long term.

Chart 2: The myriad uses of copper

Source: Bloomberg Intelligence


Source: Sanlam Private Wealth

Sanlam Private Wealth (SPW) is a trading name of Sanlam Private Investments (UK) Ltd and Sanlam Wealth Planning UK Ltd (SWP). SPW and SWP are authorised by the Financial Conduct Authority.

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by Sanlam. Any expressions of opinion are subject to change without notice.

Past performance does not predict future returns. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).


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