Over the last 14 months we have tried to provide commentary and assessment of the economic backdrop we have had to navigate during the Pandemic. These latest comments reflect the news flow since the beginning of the second quarter of 2021.
As the World Economy starts to open up for business again, the impact of the fiscal and monetary stimulus that has been injected into the financial system is starting to show the same positive impact as the vaccination programme has.
In this article I will try to explain what the economic backdrop tells us about the future direction of markets and what the implications are for global growth.
Much has been written in the last two months about inflationary pressures building in the world economy, due to the financial stimulus that has been provided by Policymakers and Central Banks. In previous articles we have indicated that the likely outcome is that inflation will be allowed to run above trend for a period to allow for a recovery in the global economy. The most recent Minutes from the Fed’s 27-28 April policy meeting acknowledges the potential that inflation will run temporarily above their 2% target due to “transitory supply chain bottlenecks” which the Fed feel will fade in the short-term. The most important comment in the Minutes related to the expectation that inflation will remain in line with the Central Bank’s longer-term goals. This kind of accommodative language has been reflected in the comments from the ECB, The Bank of England, the Bank of Japan and the Peoples Bank of China over the last month.
The stance taken by Central Banks on inflation is important as an increase in interest rates to subdue inflation has historically had a negative impact on Equity prices in the short-term, as the increased cost of borrowing impacts bottom line profitability.
It is an inescapable fact that discussions about inflation building are symptomatic of an improving economic backdrop and this should be the main takeaway from the inflation debate.
Cryptocurrencies and Bitcoin in particular have been another topic that has been in the news recently. The decision by Elon Musk of Tesla to refuse to accept Bitcoin as payment for goods, in light of the amount of energy it takes to create the virtual currency, followed quickly by the Peoples Bank of China banning financial and payment institutions from providing services related to crypto-currency transactions means that Crypto’s have fallen in value by up to 40% from recent highs. The Cryptocurrency market at this point is totally unregulated, speculative in the extreme and is not an area we would advise any client to get involved in but the sector is worthy of comment simply because it is an unknown quantity for most people.
Looking at the progress made by Equity markets year to date the signs are looking broadly positive. The MSCI All Country World Index has returned 9.40% Year to Date (YTD). In the US, the S&P 500 is showing a return of 11.30% YTD, the UK FTSE 100 is up 10.30% YTD and the Euro Stoxx 50 has risen 15.20% YTD(Source: T.Rowe Price, Bloomberg Finance L.P.)
As more normality returns in the coming months the outlook for risk assets continues to look promising. As companies impacted by lockdown start to generate operating income again, the revaluation of their shares should continue to improve and be reflected in their share price. The excess savings that individuals have accrued during lockdown is clearly being spent and this is reflected in the revised GDP predictions being applied to many major economies.
On the Covid front, data coming from Pharmaceutical companies is indicating higher than expected efficacy from the vaccines currently certified for use and the early data also indicates that the current vaccines are up to 88% effective against the B.1.617.2 Indian variant after a second dose.
Overall then the positive backdrop continues to gain traction. We are not at the stage yet where Covid-19 is not a topic that informs some of the conversations we are having but it is becoming a less important element of economic decision making as every week goes by. Fundamentals are driving markets again and the fundamental of demand are clearly there with supply picking up as industry re-opens.
Scott and I are happy to deal with advice specific to your circumstances so if you have any questions about this Market Update please get in touch.
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