Luke Hickmore, investment director at Aberdeen Investments, says inflation remains one of the market’s top concerns, warning that higher energy prices could delay or even reverse expected interest rate cuts. Speaking to Trader TV, Hickmore outlines the potential impact of the conflict in the Middle East, the knock-on effects for emerging markets, and the longer-term implications should the crisis persist.
In the episode, he also discusses how investors can separate signal from noise in volatile, headline-driven markets, as well as risks in private credit, stretched AI valuations, and rising defaults in software-related lending.
Interview
Josephine Gallagher – To start us off with some context, how have markets been reacting to the recent escalation in the Middle East?
If the Middle East crisis goes into an elongated period, I think you have to be very careful about emerging market assets. They will be right at the heart of markets concerns. They’re high beta, they should be high risk, and they will suffer if this goes into an elongated period with inflationary consequences, and that’s the real key for a lot of emerging markets. They’ve done a hell of a job getting to where we are, improving their FX reserves, improving their fiscal positions. Many EM countries are in better state than a lot of developed markets around Europe. But that doesn’t help if you’re getting inflation and the dollar starts to react as well, that could, could have knock-on impacts that I think you have to be very careful about if this goes into a longer period.
Josephine Gallagher – In times where there’s a lot of macro uncertainty, which data sets most influence your investment and trading decisions. And how do you separate signal from noise?
Luke Hickmore – Well, for a start, you stop looking back. Try to look at now. You can’t really look forward. There’s too much fog of war to really see what’s coming down the road. But looking at flight cancelations tells you how the Middle East conflict is moving around the area. Looking at how many vessels are parked in the Persian Gulf. Those kind of information sets are now readily available, and actually, just using AI to get a sense of what’s going on out in the Middle East is a really helpful tool to compress all that information into some really key to decide right. Is this right? Should Brent be going further and further, or is this just a knee jerk reaction that markets are having, and at the moment that oil price rise does feel a knee-jerk reaction, but you have to keep an eye on these. The Qatari are often coming out with information about their own production and how they’re getting it out into the world on natural gas. That’s going to be really important for Europe, a big user of natural gas, of course. So it’s these very localized datasets that I think you really need to try and get a hold of. And as I said, AI is a pretty decent tool for that these days.
Josephine Gallagher – There are a lot of other topics that we could touch on for this episode, including concerns in private credit, the questions around AI valuations, and, as you mentioned, the potential for inflation ticking back up. So what is on your priority list and what will you be most closely watching this coming week?
Luke Hickmore – I think inflation has to be right at the top of the list of worries. The shift that we’ve seen during this rising conflict, geopolitical risk and oil price is pushing the inflation markets to think about putting almost 1% onto inflation for many countries over the next year, on top of an inflation number in many cases, which haven’t really come down to levels that central banks are comfortable with. That has led to interest cuts coming off the table in many, many places, the UK being one of them. Some signs that interest rate rises are starting to get priced in as well and if that inflationary impulse from the supply shock, like an oil price hitting $90 or $100 continues, I think we’re going to see some central bank members coming out with speeches next year, just warning the market that we cannot stand by and let this happen. That’s also happening in emerging markets, by the way. And you know, much more of an inflation shock here, you may have to see interest rate rises in EM, but the undertone of private credit markets, particularly highly levered private credit markets, I can’t stress that enough, the quality end of private credit remains just that completely unaffected by all of this. This is lending in small amounts to small companies that perhaps find it difficult to get a bank to focus on them and actually say, yes, we can lend you money. And people like UBS have been talking very recently about a large rise in defaults for software-related lending now that comes back into the AI space as well. Will AI make software development completely redundant. I don’t think so. I think it’s a positive thing. I think it’s going to make a big difference in terms of productivity for the US economy, the European economies all around the world really. It’s also a risk as well. You know, you have to be very careful about what companies you’re supporting. We still like the hyper scalers. We can see the build out of the cloud is going to continue, and I think there are good opportunities there for many investors for the next couple or three years. We’d like everything else to calm down in the meantime, please.
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