Home / Analysis / World a riskier place as deflationary pressures loom: Ninety One

This downturn will be different, according to Ninety One. But the world is so indebted that there's either the mother of all paybacks coming, or the mother of all defaults.

While investors and central banks are still mostly fretting the effects of inflation and rate rises, the biggest underappreciated risk to markets is deflation, according to Clyde Rossouw, head of quality at Ninety One and portfolio manager for its Global Franchise strategy.

“We’re living in a world which is so indebted, and we’re creating more debt than we are growth,” Rossouw says. “If your debt compounds faster than your economy compounds, one of two things are going to happen: either there’s a mother of all defaults coming, or there has to be a mother of all paybacks coming.”

“There’s going to be a structural shortfall in consumption somewhere in the future, and that means there’s going to be a growth shortfall… your demand is going to fall off a cliff, and as much as we talk about inflation now I think we’re going to be talking about deflation in 2024, because the actions taken today are significant enough to change the outlook.”

That doesn’t mean that there aren’t concerns in the here and now; Rossouw is mostly engaging with companies over how they’re dealing with new geopolitical tensions and supply chain constraints, as well as a new forms of competition emerging from the rapid pace of technological innovation, which
throughout history has typically led to the undermining of large profit pools.

“But the world is definitely a riskier place; we’ve got all this geopolitical turmoil, and who knows how that’s going to go. That’s definitely different to what we had in 2007-08, but what is consistent with each of these downturns is the focus and concern around corporate profitability and how much it’s going to fall. That’s the key debate that needs to be resolved, and it’s going to be resolved in the next 6-12 months.”

But the supposed weapons of mass disruption that emerged during the Covid years haven’t entirely had the effect their proponents predicted. Two years ago, blockchain was going to disrupt card networks like Visa and Mastercard, which have been around since the 1950s; it hasn’t, while fintech innovations like buy now pay later have given those card networks more opportunities to clip the ticket.

“Where there are real world threats we have to think about how businesses are impacted, and obviously in those threats if we can find businesses we can invest in that are going to be leading the disruption that’s an opportunity to make money as well,” Rossouw says. “There’s a defensive and offensive of that work.”

The Global Franchise strategy was started just prior to the GFC, and went into the downturn very conservatively – one of the key characteristics of the strategy is not over-indexing to financial leverage or stock market sensitivity. The downturn that everybody expects this time is different, Rossouw says; banks are in a better position now – they have less leverage, and don’t sell “extraneous” financial products to people for the wrong reasons – but what’s similar is the stress building up in the real estate and housing markets, particularly in the United States. It’s in that potentially recessionary environment that the strategy should do well.

“Quality companies typically generate prodigious amounts of free cashflow, which they can reinvest into their own business,” Rossouw says. “They’ve got lots of good ideas and they can spend money on those good ideas, and those good ideas will generate additional revenues and therefore profits. They’ll grow faster, for much longer than the market thinks. And the valuations you can buy those businesses at are typically not demanding, and you can make outsize returns.”