Please find below our interim Investment Market Update as at 15th October 2021.
Blue Sky Investment Market Update
That’s been a choppy few weeks!
Most global indices have fallen as there has been a rotation towards banking and oil stocks, along with companies who can more easily pass on increased costs to consumers. Such assets have helped to largely support the FTSE 100 although the mid-cap and smaller UK indices have not been immune from the pull back, demonstrating significant volatility.
As we have highlighted many times, these rotations will continue in a series of mini-cycles as international investors react to short term news flow, opportunities and fears.
It’s not just equities that have fallen in value
UK fixed income funds suffered their largest net outflows in September, since March 2020, according to Morningstar, the research agency. The backdrop to this is concern about inflation and interest rate rises. By way of perspective though, as reported in Investment Week, Bhavik Parkeh at Morningstar stated that the outflows however were only 10% of the outflows experienced last year, in March 2020.
Even the reliable Corporate Bond market in the UK saw outflows, but interestingly the global bond market saw net inflows.
Interestingly, active sustainable funds once again led the equity inflows with sustainable investments accounting for seven of the top ten fund inflows. Reinforcing our long-held sentiment.
UK interest rates
It has been appearing more and more likely that interest rates will rise soon. In an article in Investment Week, it was highlighted that there is now a 72% chance of a rate hike on 16th December. Whilst not far away, any decision to change the status quo depends heavily on further strong data pointing to an economic expansion and a tightening labour market and inflation not spiking further.
A gradual recovery is underway
GDP in August grew by 0.4%. Perhaps more importantly, in the three months to August the economy grew by 2.9% against consensus forecasts of 3%.
A sure sign that a recovery is underway is that in London more lattes are being bought! According to Bloomberg’s Pret index (who’d have thought!), more bankers in London’s financial districts are buying lattes and are returning to their desks every week. The city’s main cinema, theatre and shopping districts are also showing increasing signs of normality, with Pret A Manger sales in the West End now even higher than they were before Covid-19. The same buoyancy however hasn’t returned to New York according to Bloomberg’s Pret index.
Supply chains continue to hamper growth
However, weak supply chains are putting the brakes on growth, despite demand. A report in Bloomberg highlighted that Apple have had to slash production targets for its latest iPhone 13 model by up to 10 million units because of chip shortages. Meaning Apple will fall short of its forecast to make 90 million new iPhone models in the fourth quarter as Broadcom and Texas Instruments struggle to deliver enough parts.
Summed up nicely
As we have spoken about many times, whilst we are experiencing global growth, the rate of the recovery is not unfolding as expected. I’m in London for a long weekend celebrating our 22nd wedding anniversary and I’ve just read an article in the Evening Standard which encapsulates nicely our thoughts at Blue Sky as to what we believe will unfold.
These are the comments from Rupert Harrison, the former Chair of the Council of Economic Advisers and a multi asset portfolio manager at BlackRock.
“The swing factor that will determine whether growth remains resilient will be how persistent price rises turn out to be. A lasting period of high inflation could eat into consumer incomes and undermine confidence.
Central banks are sticking to their prediction that inflation will prove ‘transitory’, even if the timelines have already been pushed out from six months to a year or two. In most cases they are probably right. Many bottlenecks will unwind and prices will fall back down, actually reducing inflation. For example, second-hand car prices will eventually fall back and the shortages of microchips will ease and then manufactures can ramp up new car production again. Similarly, we are seeing the sky- high price of shipping freight reduce. Prices for shipping goods from China have already halved from their peak.
A big source of inflation which is unlikely to unwind quickly, is energy inflation. The best that can be said about higher energy prices is that they tend to be a one-off source of inflation. Unless prices rise again next year they won’t be adding further to inflation numbers. The biggest risk to inflation is labour shortages and the impact of a tight labour market.
However, the pressure on inflation from rising wages takes years to build. Central Banks will be able to respond to any overheating economies with gradually higher interest rates and will mostly regard that as a good problem to have when their bigger fear is still slow growth and deflation. For now, vacancies are at record highs, most consumers and businesses are in decent shape, with wages rising and cash available for new business investment.
Despite everything going on, the most likely outcome remains that we emerge in the Spring with the economy still growing, unemployment low and continuing to fall, and inflation elevated but under control. It could be a bumpy ride though and expect increased negative news flow”.
However, here at Blue Sky we encourage you to look beyond the headlines as there are some fantastic opportunities unfolding in harmony with the need to invest in our future and improve infrastructure. We remain optimistic!
Have a great weekend.
Best wishes,
Gary Neild and the Investment Team
Risk warning
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.