Commentary on May-June 2021
The optimistic mood continued with surging economic activity as further progress on the vaccine rollout allowed an easing in lockdown conditions. But with share valuations already anticipating much of this, stock-markets made little headway in May before picking up in June. For the period from the end of April to end June, major stock markets registered gains of 2-4%. Emerging markets rose by around 2% but Asian shares were flat. After a quiet May bonds also showed small gains in June.
Global PMI Surveys for May and June pointed to increasing activity across manufacturing and service sectors with sub-indices at record highs, reflecting rapid rises in growth and new orders. The flip side of this was a sharp rise in costs owing to a shortage of materials like bricks and concrete, electronics, plastics and metals, as well as a failure to recruit sufficient workers. Base effects from last year pushed inflation higher, with prices in the United States rising by 5% and core CPI (Consumer Prices Index) hitting a 28-year high of 3.8%. Eurozone CPI at 1.9% tested the central bank target of ‘below but close to 2%’, whilst UK inflation at 2.1% came within the 1% flex from its central 2% target.
The United States Federal Reserve caused some confusion with mixed messages as it tried to maintain its sanguine approach to inflation whilst acknowledging that the data was higher than expected. Future Fed’ projections now imply two interest rate rises in 2023 but Chair Jerome Powell emphasised that these were the opinions of current board members and not Fed’ policy. He also reiterated that they would not raise interest rates pre-emptively and will wait for evidence of actual inflation or other imbalances before acting.
The regular meeting of the Bank of England’s Monetary Policy Committee concluded with no change in interest rate or the level of quantitative easing. The Committee raised its growth forecast and said that it expects inflation to peak at just over 3% later in the year before returning towards its 2% target. Independently, the Bank’s chief economist, Andy Haldane, warned that inflation was likely to end the year at close to 4%.
There has been a shift in the inflation narrative; last month’s higher than expected releases were accepted by investors without fuss. Despite headline writers trying to kick up a storm there was no sense of panic; if anything, the ‘transitory inflation’ story emanating from most central bankers gained credence, with US Treasury bond yields sliding some 25 basis points below their March high.
Inflation remains a tricky call; the over-riding story from the PMI surveys was of supply bottlenecks and rising costs. For now, it is accepted that these supply problems will be ironed out as buyers baulk at the sharp increase in prices and companies find it easier to source materials and new workers. For example, Chinese authorities recently announced a ‘zero tolerance’ crackdown on hoarders and speculators in raw materials; this took the shine off metal prices, which reversed part of their parabolic 2021 rise.
But with the pandemic still rampant in Asia supply bottlenecks, especially in the electronics sector, won’t be easing any time soon. There are no quick fixes to the worldwide shortage of shipping containers and a UK shortfall of lorry drivers. These factors might all prove to be transitory but, in the meantime, they could test the patience of investors, if not central bankers, if they push headline rates much higher.
Our view remains that stock-market valuations are vulnerable to a set-back but with short-term interest rates offering negative real returns (adjusted for inflation) investors will view lower share prices as an attractive investment opportunity.
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. Our value stocks have continued to enjoy a strong recovery so far this year.
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.