Commentary on August 2021
Global equity markets reached new highs in August, as a raft of positive earnings and a broadly dovish tone from the US Federal Reserve offset concerns over the prospect of monetary policy tightening and ongoing spread of the Delta variant. Gains ranged from 2.5% in Europe and the UK to 4% in Japan and the United States. Emerging and Asian markets dipped mid-month as China toughened regulatory control on domestic technology and education related shares but recovered to end the month up 3.6% and 2.7% respectively. Bonds showed little change except for a slight rise in UK index-linked and emerging market bonds.
A shortage of labour and materials continued to act as a drag on growth; global data reflected a slowdown from the previous high levels of activity but this remains hard to judge until supply bottlenecks subside. Employment data in the United States surprised with considerably fewer new jobs than had been expected but, with vacancies close to record highs, this continues to suggest a reluctance of many Americans to return to the workforce. Eurozone inflation hit a near-decade high of 3%.
The US Federal Reserve signalled its intention to start reducing the bond-buying programme (tapering) this autumn; however, Chairman Jerome Powell continued to stress that the timing remains flexible, with policymakers monitoring economic data and pandemic risks. He also reassured markets that this should not be taken as an intention to raise interest rates any time soon, that they have different and more stringent tests in place to determine that outcome.
The European Central Bank (ECB) raised their projections for future inflation rates, but only the short-term data would trouble their mandated target. Chief Economist Lane stressed that policy makers are determined to keep financing conditions across the 19-nation Euro-region favourable and signalled that they’ll take their time to decide how to conduct bond purchases once their pandemic emergency program expires. The Bank did announce a small reduction in bond purchases, specifically referred to as ‘recalibrating’ not ‘tapering’!
Early September has seen a small pick-up in stock-market volatility with the Delta variant still rising in the US and the Mu variant spreading across 39 countries. The exception has been Japanese shares, which have reacted favourably to PM Suga’s resignation.
Strong employment data this week in the UK prompted talk of a rise in interest rates as early as next February, but with the rise in UK taxes due to take effect from April 2022 we feel that the Bank of England might err on the side of caution; they will probably want to see how much this dampens activity and confidence before imposing additional tightening.
The past few weeks has seen the central banks of the United States, United Kingdom and Europe all introduce the notion of tapering (the gradual withdrawal of monthly bond purchases), probably before the year-end, without a consequent collapse in bond prices. Possibly the key to this success has been the collective distancing of this proposed withdrawal of liquidity from interest rate policy, with the message that rates won’t be changing anytime soon. For now, with inflation numbers in the US dipping slightly, investors are happy to go along with this. We remain of the view that fixed interest bond prices don’t sufficiently reflect the risk of potential inflation.
Scant attention has been paid to the imminent elections in Germany. The world’s fourth biggest economy will this month see Chancellor Angela Merkel, undeniably Europe’s prominent statesperson, replaced by a relative unknown. With candidates from her conservative coalition struggling, the current leader in the polls is a social democrat who, if elected, could lead a programme of fiscal reform in contrast to Germany’s historic austerity.
We continue to believe that interest rates will remain low, causing investors to seek higher returns elsewhere, most likely in equity markets. This won’t prevent volatile markets, or the occasional correction, but it increases the likelihood of investors targeting sell offs as an opportunity to boost their savings.
How are we currently positioned?
Our fixed interest funds continue to have limited exposure to rising yields as we feel that current levels don’t offer sufficient reward for the potential risk of capital loss.
We are holding a mix of value and growth stocks but have sought to minimize exposure to US listed FANGS, where valuations have become excessive. We have been researching a few additional funds to add when markets present an opportunity.
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these ‘alternative’ assets are funds invested in gold & silver, infrastructure, agriculture and absolute return strategies.