Commentary on September 2021
Rising energy prices saw Inflation replace the pandemic as the prominent investment concern, leading to falling share and bond prices around the world. Stock-markets ended the month down 2-3% in sterling terms with prices continuing to slide in early October. The main UK indices fared better, easing 1% lower and Japanese shares rose by over 4% on a surge of optimism over the new prime ministerial appointment.
The sell-off was in part driven by a rise in government bond yields, which rose amid investor concerns over imminent central bank tightening, higher inflation and a fiscal impasse in the US Congress. Government bond prices fell by 4-5% in the UK.
Global economic growth continued in September, albeit at a generally slower pace than the initial post-lockdown phase. Further disruption to supplies, together with a shortage of labour, caused input cost and output price inflation to quicken and new orders to slow; inflation in the US remained above 5% and in Europe hit a 13-year high at 3.4%. As unemployment rates in the US and UK fell, it was noticeable that vacancies continued to rise. With most furlough schemes now ended, it will be interesting to see if this alleviates the shortage of workers; if not then wage inflation will become more likely.
The US Federal Reserve (Fed) took a stronger line at its regular meeting by suggesting that tightening, in the form of tapering its monthly bond purchases, could start this November, and be completed by mid-2022. This, plus more hawkish comments from Chair Powell shook a complacent bond market, which also noted a tougher tone emanating from the Bank of England. Money-markets are now discounting a rate rise in the UK by February of next year with a second rise in August.
Politics saw changes at the top in Germany and Japan, with the former struggling to form a new coalition government, but Canadian Prime Minister Trudeau returned in charge of a minority government.
The parabolic rise in energy prices has raised the prospect of stagflation-like risks where rising prices are accompanied by sluggish economic growth. The record rally in gas and power prices across Europe has already forced some factories to halt production. For others the higher input costs will hit profits, thus undermining the earnings priced into market valuations.
The shortage of labour, and supply bottlenecks extend beyond the UK; from a global perspective, substitute a shortage of cargo ships for lorry drivers. Industry surveys paint a picture of delayed orders, a struggle to get hold of components and a lack of skilled workforce. These bottlenecks have previously been viewed as temporary, and part of the ‘transitory’ inflation argument. The concern is that in some areas there is no quick fix- building more cargo ships or opening new mines will take years rather than months.
For now, the growth problem isn’t a lack of demand, with jobs plentiful and high levels of savings, but one of insufficient supply. But we’re facing a back-drop of higher energy prices over the winter with the prospect of higher taxes in April; add in the potential for a rise in interest rates and we could see a squeeze on consumer spending and corporate margins.
We remain broadly positive on the growth story but feel that the balance of risks is changing. The level of unknowns has increased and the prospect of higher-than-expected inflation with slowing growth runs the risk of central bank policy errors. We are still looking for a market sell-off as an opportunity to invest further but feel there is no urgency in the current climate.
Over the longer term we continue to believe that interest rates will remain low and unlikely to offer a return above inflation. Equities will remain volatile but offer the best long-term prospect of producing a return above inflation.
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. This was borne out when most of our funds were only slightly lower during a poor month for bonds.
Our Gold & Silver fund detracted from performance, but the Japanese and Russian funds gained over 4%.
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.