The unfolding saga in Afghanistan, with disturbing images emerging from Kabul, have dominated news broadcasts lately. Given the unexpected outcome, it is not unreasonable to ask whether there are any implications for investors from events there. As it happens, markets have taken it all very calmly, with the ennui that characterises the summer holidays for investors very much in evidence. True, Afghanistan is relatively small in economic terms, with little impact on world trade likely from any disruption to business activity there.
Yet, aside from highlighting the fact that even the most powerful nations in the world can be wrongfooted, it does seem to me that the potential for an increase to the equity risk premium now exists. Presently investors have felt able to shrug aside the effects of the pandemic, but if the change in leadership in this most volatile part of the globe allows international terrorism to flourish once again, this added uncertainty could start to impinge upon sentiment.
Of course, this is not a given and no doubt any new administration will be keen to demonstrate that they are worthy to be tasked with running the country. But at the very least recent events have underscored that the world is becoming less predictable and arguably more dangerous. With economic recovery continuing, albeit at a slightly slower pace than expected, this is an unwelcome development, particularly as the spread of the Delta variant is beginning to undermine confidence.
In the meantime, yet another takeover bid from American owned defence contractor, Cobham – itself a British business bought just two years ago, for Ultra Electronics, emphasises the relative cheapness of UK companies. A cloud does exist on the horizon, though, with the news that wages are soaring. This will present Chancellor Sunak with something of a conundrum. Perhaps interest rates may have to rise in due course, though the latest inflation figures came in below expectations.
Even so, the cost of living is still expected to rise as the year progresses, perhaps reaching 4% or a little above. This seems inevitable, given seasonal pressures on prices and the ending of the VAT concession on hospitality. The danger is that this will feed through into wages, which would be a cause for concern, though most economic forecasters view this as an unlikely scenario. Still, life does feel less certain, with more risks entering the equation. Knowing how best to price that risk is difficult indeed.
