As such, investors face an uncomfortable dilemma: embrace investing in China, for all its perils, or ignore the most significant economic force of the next two decades. This is not an easy choice, but avoiding short-term pain in Chinese equities is likely to be the big mistake in the long-term. It may be a case of simply accepting that it will be a wild ride.
Changing inflation expectations
Older generations can remember the grim reality of inflation in the 1970s and 1980s. They will have seen first-hand its power to erode spending power, to destroy wealth and to hurt corporate profitability. They will also remember the social pain of tackling inflation, with interest rates hitting 17 per cent in 1979.
For subsequent generations, inflation has been a non-issue. A confluence of factors, including technological progress, globalisation, demographics and the rise of Chinese manufacturing, has ensured that the inflationary genie has remained firmly in its bottle. While investors understand the risks of inflation, it is not something anyone under 50 has had to experience or plan for.
That may be changing. The factors that have kept inflation suppressed are shifting: China is becoming more isolationist, the demographic impetus is slowing, reshoring and shorter-supply chains are raising the cost of goods. This could be a shock: the people in charge have already shifted from those who understand inflation to those who have never lived through it (Rishi Sunak was born in 1980). Will they respond effectively to a different environment?
There is no need to panic on inflation. The current high levels of inflation are unlikely to be sustained. However, it may be structurally higher than in recent history. Savers have become increasingly aware that they need to preserve the purchasing power of their retirement pots, but this may become crucial as the environment changes.
Ben Kumar is a senior investment strategist at 7IM
