| The pace of growth of the post-lockdown global economic recovery has slowed over the last 3 months. Concerns about the impact of growing inflation on Monetary Policy is causing market makers to look more closely at inventories, future earnings, and inflation sensitivity to assess the share price of individual firms.
The debate regarding the outlook for inflation has raged for the last few months with the “persistent versus transitory” camps arguing their respective cases as data becomes available. As matters stand the consensus view being expressed by Central Banks is that the inflation spike is transitory but less transitory than it looked even 2 months ago. It is becoming more apparent that there is no easy fix for global supply chain disruptions. As the global economy awakens from its Covid induced hibernation it is being outpaced by the recovery in demand we are currently witnessing. The process of catching up is going to take longer to work itself out than previously anticipated. The recovery period is being elongated by the current energy crunch that we have seen come to the fore over the last 4 weeks. On the eve of COP 26, never has the UK’s dependence on fossil fuels been brought more into focus. Hindsight is a wonderful thing but Centrica’s decision in 2017 to close the UK’s only natural gas storage facility looks ever more irrational.
World Markets, where your assets are invested, have pretty much moved sideways or slightly down over the last 3 months, as the aforementioned supply/demand imbalances have held progress back. Inflation will in all probability remain high through the remainder of 2021, but we should see a decline in early to mid-2022. The likelihood of a strong business cycle as recovery continues, reinforces our belief that equities offer better value than bonds for at least the next 12 months.
If we look at individual markets, we would have a preference for the less expensive markets as the most likely place to find value going forward. Europe’s exposure to cyclically sensitive sectors such as industrials, materials and energy gives it the potential to out-perform as economic activity picks up. The Eurozone looks on track for a return to above trend growth over Q4 and into 2022.
The UK FTSE 100 Index is the cheapest of all major developed equity markets in late 2021. An easing in supply constraints should allow the Bank of England to hold fire on interest rate increases as inflationary pressure reduces. Internal demand should help the UK market generate higher returns for investors over the medium to longer-term. US Equities look expensive and appear to have seen the easiest of the gains already reflected in their price. The impact of potential US tax increases may impact valuation going forward. We would still hold US Equities as a diversifying element of asset allocation but would not recommend increasing exposure to this sector for the reasons mentioned.
Japan has recently seen a further change at the top of the ruling Liberal Democrat Party. Fumio Kishida won the leadership race and has called for a General Election, likely to be on the 31st October. Kishida looks intent on continuing the “three arrows” strategy, developed by former Prime Minister Shinzo Abe, as the key elements of his macro-economic policy management. Japan offers the potential for worthwhile investment returns but only if the government can spark economic growth.
China continues to use its economic power to change the direction of travel of the economy away from the worlds low-cost manufacturer to a self-sufficient market that services the growing consumer spending needs of its own population. The status of highly leveraged property businesses like Evergrande continues to dominate investor concerns along with continuing tension with Taiwan. At present we still avoid direct investment in China due to concerns about, regulation, accounting practices and transparency.
For the purposes of diversity in asset allocation, we tend to recommened a multi-asset blended approach to our investment preferences. Therefore, within the make up of a client’s portfolio we would utilise a combination of different asset classes spread across different geographies to achieve long term growth in a potentially less volatile manner.
Overall then a more challenging investment backdrop than we had been expecting to face at this point in the recovery cycle. It feels as if we are tracking about 3-6 months behind where we would have expected to be at this point in normalised conditions. The signs are still very positive but here are hurdles to be cleared before we see the impact of the waking of the global economy being fully reflected in asset price values.
As has been said before, Scott and I are here to provide you with advice and support, so please contact us if you want to discuss the content of this document relative to your specific circumstances. |
