Six months to end October 2021
Over the past six months, evidence has mounted that the progress in administering the Covid-19 vaccines is breaking the link between cases, hospitalisations and deaths, allowing restrictions to be eased and the economic recovery to take hold. As a result, there were good returns from the both Global equities (+7.4%), underpinned by continued strength in US markets, and from UK equities (+3.3%). Unexpectedly, Fixed Interest investments (+0.8%) remained broadly stable reflecting a number of technical factors. Primarily this relates to the continued buying of bonds by Central Banks, low issuance by government Treasury departments, and high demand from institutions following a period of strong equity returns.
Markets were rattled by a myriad of concerns including the US Federal Reserve (Fed) raising interest rates too quickly, US economic growth being revised down for the third quarter, President Trump warning that he was prepared for a ‘long’ government shutdown if he did not receive the funding for a border wall with Mexico that he expected, as well as the UK’s exit from the EU and the ongoing US-China trade talks.
President Biden’s first term is now well under way with the vaccination programme making good progress and the economy recovering well. Investors have started to worry that the enormous $1.9 trillion economic stimulus bill may, in fact, be too large, potentially stoking the economy into overheating. Certainly, higher than expected inflation figures have been viewed with concern despite reassuring comments from the Federal Reserve. Nonetheless, investors remain optimistic that the end of the furlough support scheme will not derail the recovery and indices have risen to new highs once again.
European vaccine rates are rising but a vast disparity exists between the faster acting countries such as Spain, where 80% of the population have had two vaccines, to the eastern border where Romania is struggling to reach 23%. Nonetheless, economic activity is bouncing back at its fastest rate in fifteen years, and, although the stimulus package that the ECB can deploy is also relatively small, it does represent a change in thinking as it will be deployed over a number of years. Thus, there is less fear amongst the southern nations that the fiscally prudent states of Northern Europe will insist on the same early interest rate rises that were so damaging in 2011.
In the UK approximately 80% of the population over the age of 12 have had both doses of vaccine whilst 87% have had at least one dose. This high level of take up is breaking the link between the cases, which have risen once again due to the Delta variant, and hospitalisation, as most of the cases are now in the younger, healthier, population. Strong recruitment figures suggest that the end of the furlough scheme will not lead to a surge in unemployment. However, there is evidence that necessary protective working practices are causing bottlenecks in production and this is leading to higher levels of inflation. At present the Bank of England remains unconcerned, describing the issues as ‘transitory base effects’, but investors may react badly if they feel that the authorities have fallen behind the curve in controlling inflation.
Asia & Emerging Markets
In being the first country to recover from the Covid-19 induced slowdown, China delivered significant growth of 18.3% in the first quarter of the year, in comparison to the depressed first quarter of 2020. Progress was such that the authorities tightened lending conditions for the economy, leading to a reversal in equity markets, but interest rates have now started to fall once again. However, this may be too late for Evergrande, a major property developer, which is close to bankruptcy and the recent crackdown on profiteering in the education sector has also hurt sentiment. Elsewhere, India and Brazil have both seen a welcome decline from the high infection rates of earlier in the year.
After eighteen months of rising markets, investors are becoming more cautious as governments seek to keep their economies open despite the rise in Delta variant infections. In the meantime, the policies that have sought to protect economies in the crisis may sow the seeds of the next slowdown through higher inflation and rising interest rates. Given the share price rises that have already been seen, we anticipate some caution amongst investors over the autumn months as they seek evidence that company earnings are recovering as expected and that inflation is not about to start running out of control.
Murray Asset Management UK Ltd December 2021
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*Based on the representative indices.