Bill Dinning: Britain is a bargain – but global stocks could fall further

Bill Dinning, chief investment officer of Waverton Investment Management since 2019, was previously head of investment strategy at Coal Pension Trustees, helping to run the £20bn Coal Industry Pension Schemes. He began his career with investment bank PaineWebber and also worked for investment banks Merrill Lynch and UBS Warburg.

Bill will be on a panel at the MoneyWeek Wealth Summit examining the outlook for the global economy. I caught up with him to hear his views on some of the hottest topics in finance today.

The war in Ukraine gave markets a nasty shock this year. Will it remain a key factor next year? And how much should investors worry about China invading Taiwan?

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The war in Ukraine is going to have an impact on the investment landscape as long as it carries on. Ukraine and Russia are extremely important producers and exporters of a variety of commodities. It’s not just a case of Russia supplying energy to Europe – or deciding not to – but Ukraine and Russia are both big producers and exporters of food, notably grains, and other commodities crucial to various parts of the global supply chain. So the war is a threat not just to global stability but also to hopes that inflation will subside: supply shocks could boost consumer prices.

I think Beijing is unlikely to invade Taiwan, however. The financial, military and reputational cost to the People's Republic of China (PRC) seems prohibitive. It would be incredibly destabilising, especially for the crucial semiconductor sector (Taiwan’s TSMC is a key global supplier), and make the PRC a global pariah. China’s People’s Liberation Army is not very experienced in conflict, and Taiwan is extremely difficult to invade. Only 10% of its coastline is suitable for an amphibious landing.

But keep an eye on Chinese politics. If Xi Jinping eventually comes under domestic political threat, then, like embattled autocrats throughout history, he may be tempted to launch a military operation to rally people around the flag.

Inflation in developed economies is at 40-year highs. Will it finally fall soon?

Judging by fixed-income securities that allow investors to take a view on future inflation, price rises are thought likely to subside.The presumption is that central banks are determined to squeeze it out by causing slowdowns with higher interest rates, especially in the US and UK.

I share that view; with demand set to subside on both sides of the Atlantic, it seems plausible. Events in Ukraine could change the outlook, however, especially through the energy market – a spike in the oil price would boost inflation.

Is the global bear market in stocks over yet, or are further falls in equities likely?

The risk to the global stockmarket is that despite widespread talk of recession, earnings expectations remain optimistic. In the US, for instance, profits are expected to grow by 6% next year.

That seems implausible as the central-bank induced slowdown feeds through; the US Federal Reserve has made it quite clear that it wants the level of demand in the economy to slow. Earnings may not crater the way they did in the financial crisis, but they should certainly dip.

The upshot is that there is scope for another down leg in the market as optimistic earnings forecasts are recalibrated, especially in America, which sets the tone for world markets.

Will sterling stay weak?

Sterling’s swoon to a record low against the dollar hit the headlines in September after the mini-Budget. But this isn’t a straightforward matter of the pound being weak. Most currencies have been weak against the dollar this year.

A more interesting story is the exchange rate with the euro. The pound has not been weak against the single currency. The sterling-euro rate has been remarkably stable since the Brexit referendum, moving in a range of about 7% up or down around an average of €1.14 since right after the vote. It didn’t fall out of the range after the mini-Budget.

So watch the sterling-euro rate. If the market starts to worry about the UK over the winter – if it thinks the monetary squeeze and tax rises are going to sink the economy, in other words – sterling will weaken against the euro. If it slides below €1.08, it will break its six-year range. If it breaks out of the range the other way, Britain will be deemed to be doing better than the euro area. For now, forex investors are treating the euro and sterling very similarly.

Are there any regions, markets or asset classes that look highly overvalued right now? And any that look like good value?

Nothing looks horribly overvalued any more; bear markets have removed the froth. Britain, meanwhile, is a bargain. Despite all things that could go wrong, there’s a lot of bad news already priced in. The UK stockmarket is trading on nine times forward earnings, and earnings are expected to decline by 2% at present. That implies less scope for a negative surprise as earnings forecasts are recalculated than in some other markets.

We also like some parts of the property market, notably specialist real-estate investment trusts (Reits). When it comes to investments that are sensitive to interest rates, like these trusts, investors have thrown the baby out with the bathwater. Yet some of the leases these property-investment groups own are linked to inflation, which makes them a good investment at a time like this.

We also think government bonds in Britain and America look like a reasonable investment for the first time since the global financial crisis given the likelihood of central banks squeezing inflation out of the system.

More broadly, investors should be wary about holding too much cash as inflation is eroding its real value. There could be plenty more volatility ahead, but as long as you can take a one-to-three year view, a diversified multi-asset portfolio looks set to appreciate.