The struggle is real for investors in the high-rate era

This is an audio transcript of the FT News Briefing podcast episode: ‘The struggle is real for investors in the high-rate era’

Marc Filippino
Good morning from the Financial Times. Today is Monday, December 5th, and this is your FT News Briefing.

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The EU and the US are at odds over green subsidies. And Opec is taking a wait-and-see approach to oil production. Plus, the FT’s Katie Martin explains what the end of cheap money means for investors.

Katie Martin
You’re not going to find that markets are a rising tide that just raise all boats.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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The EU is trying to keep up with US green subsidies. The bloc’s trying to counteract the competitive effects of the US’s nearly $370bn climate package called the Inflation Reduction Act. Congress passed it earlier this year, and it’s causing some tension between the US and the EU. The FT’s Henry Foy joins me to talk more about it. Hi, Henry.

Henry Foy
Hey, Marc.

Marc Filippino
OK. So why does the EU have a beef with the Inflation Reduction Act or the IRA for short?

Henry Foy
So what the EU countries are saying is, look, you guys have pulled together this fantastic package we agree with the intention. We also want to promote green energy and climate friendly technologies. However, by making it so vociferously buy American and by only allowing purely American, American-based companies to access these subsidies, you’re in fact breaking WTO, World Trade Organization rules. It’s massively subsidising your own economy, and this is a kick in the teeth encouraging our companies, European companies, to effectively move to the US, build factories there to benefit from these tax cuts and subsidies.

Marc Filippino
And how will the EU be more competitive?

Henry Foy
So really for the last few weeks, European leaders have been running around complaining about this and sort of demanding that the European Commission, which is the executive of the EU, do something. Yesterday, Ursula von der Leyen, the president of the European Commission, effectively came out and said what she would do — really amounts to rolling out the EU’s own fiscal firepower and saying, these are the weapons we have. Do you really wanna go into a trade war? She’s saying we could adjust and streamline. These are the words she uses — the state aid rules. You should read that as we could loosen them, which in effect would allow governments to plough money into private businesses, if they like. And in effect, you could have something that looks like a trade war, a subsidy war between the EU and the US. Von der Leyen was keen to say, look, that’s not what we want. We don’t want a trade war. But, you know, if it quacks like a duck and looks like a duck, it’s probably a duck.

Marc Filippino
All right, these two ducks are meeting today. The EU and US officials are meeting today. What are they gonna talk about?

Henry Foy
Well, that’s right. And the EU have maintained and consistently said, look, we would quite like just to talk this out. The EU would like to diplomatically work this out. So what the Europeans want to do is use today’s Trade and Technology Council to raise these issues and effectively bring the IRA dispute into a wider context, trade and technology relations with the US and areas where Washington and Brussels work closely. What the Americans want to do is say, fine, we can talk a little bit about it, but the TTC is for other issues. We’ve set up this special task force to discuss the IRA, effectively kicking it into the long grass a little bit and separating it from the wider issue of transatlantic relations. Let’s see what comes out of the meetings today, but I have a feeling that this isn’t going to be sorted out through talking. And actually you are gonna see large amounts of subsidies on both sides of the Atlantic, chasing technology in climate change and green energy.

Marc Filippino
Henry Foy is the FT’s European diplomatic correspondent. Thank you, Henry.

Henry Foy
Cheers, Marc.

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Marc Filippino
Opec+ met yesterday and the oil cartel decided not to make any immediate changes to the group’s production targets. The group is waiting to see how a new oil embargo could affect Russia, which is one of the leaders of the cartel. FT energy correspondent Tom Wilson has more on Opec.

Tom Wilson
By the middle of last week, it became clear to them that they were simply unable to take a long-term view on the oil market because there is still so much uncertainty specifically around the G7 oil price cap. So today is the first day of the EU sanctions on exports of Russian crude. And we now know that the G7 has decided to set a price cap of $60 a barrel for importers such as Russia and China if they want to continue to access European shipping services and therefore get around that sanctions, they can do so. But Opec+ still doesn’t really know how that is all gonna play out. Is Russia going to play ball with the price cap and allow exports to countries like China and India under that price cap mechanism? Is the price cap mechanism gonna work? Are insurers going to be willing to take Russian crude on their vessels? So there’s a huge number of uncertainties at this point in time around the oil market. And I think with that in mind, Opec+ took the decision it’s too soon for us to make this call. Let’s wait and see.

Marc Filippino
And Tom, how might the oil market react to this move?

Tom Wilson
It all depends on how many of the Russian barrels that used to go via sea freight into Europe that have now been banned, how many of those can be reshuffled and redistributed to other parts of the world? Either using the price cap mechanism or through Russia using its dark fleet. If a lot of those barrels get reshuffled, then we shouldn’t see a major impact on price. If, however, Russia decides that it doesn’t want to play ball in this game and it’s actually willing to cut production, then I should note this is something that Russian deputy prime minister Alexander Novak said yesterday was that Russia was not willing to play ball with the price cap and would be prepared to cut its own production if necessary. So if Russia does that and suddenly we see a million barrels a day of Russian production coming off the market, then we’ll see a big price reaction to the upside.

Marc Filippino
And now, Tom, when does Opec meet next?

Tom Wilson
So the next official meeting is in June. But another thing that Opec+ said was that the Joint Monitoring Committee would meet in two months time. And the Joint Monitoring Committee will have the power to call a ministerial meeting if it sees fit. So if there’s been a major shift in the market, one that Opec+ needs to respond to, then they’ll call a meeting and that would most likely happen at the start of February.

Marc Filippino
Tom Wilson is an energy correspondent for the FT.

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The era of cheap money is over. Central banks around the world are raising interest rates, and it’s suddenly a lot more expensive to borrow. Markets have reacted accordingly. The S&P 500 is down nearly 20 per cent on the year. And the long-term US government bonds staged the biggest drop since 1788. So what are investors doing now that money is more expensive? The FT’s markets editor, Katie Martin, looked into this exact question and she joins me now. Hey, Katie.

Katie Martin
Hey, how you doing?

Marc Filippino
So this era of cheap money . . . 

Katie Martin
Yeah, it was great (Laughter).

Marc Filippino
It was great. It was, I mean, everybody loved it. I loved my stimulus checks like it was a good time for all. It peaked during Covid, but it’s really been around since the 2008 financial crisis. So people have gotten comfortable with this idea of cheap money. How are investors viewing this next high interest rate period that we’re entering then?

Katie Martin
I found some real frustration and confusion and exasperation. So I talked to a lot of fund managers as I have done all year, and the tone of these conversations has shifted into something where I feel like I’m almost a kind of therapist.

Marc Filippino
(Laughter)

Katie Martin
Like people are saying to me, look, you know, basically I thought I understood inflation. I thought I understood how markets work. I thought I understood how to divvy up my portfolio between different types of assets. And everything keeps blowing up at me all the time. And people are just out of ideas really at this point. They’ve had an absolutely terrible year and the mood is really quite downbeat.

Marc Filippino
So one of the people that you spoke to for this piece actually argued that investors now have to be more disciplined, which is a good thing. Can you unpack that argument a little bit?

Katie Martin
Yeah. There’s a certain chunk of the investment community that’s never been comfortable with, for example, tech stocks from unprofitable tech companies just flying to the moon and all this kind of hubris and enthusiasm around certain pockets of the market. Investors are going to be much more discerning about where they put money to work. And I think the other thing that a lot of investors are saying is, look, this whole process where money costs something and investors are more choosy means that there will be more winners and losers. You’re not going to find that markets are a rising tide that just raise all boats. So investors that know what they’re doing and are good at spotting winners in theory should have a better run over the next, you know, 12 months or five years or however long it takes. But there’s no disputing that it’s a very difficult environment for everybody because there’s just not much of a safety net if stuff goes wrong.

Marc Filippino
But isn’t that also good for the economy, too, that we’re betting on businesses that actually have some substance to them rather than like zombie companies that just live off cheap debt?

Katie Martin
Big picture, yes, it probably is worth slightly more Darwinist approach to economics and to markets that the difficult thing about that is that it implies lower employment and a lot of people have jobs in what someone might, you know, perhaps unkindly call a zombie company. And that job’s important to them. And it’s kind of difficult to say, well, you know, my super rational brain and my super disciplined investment style tells me that you shouldn’t have a job anymore. It’s a difficult argument to make. So there will be winners and losers out of this process for sure. But I think there probably will be a lot less investor cash that is burned on speculative projects that never really get off the ground.

Marc Filippino
Katie Martin is the FT’s markets editor. Thank you, Katie.

Katie Martin
Pleasure.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.