Please find below our interim Investment Market Update as at 18th June 2021.
This week’s Market Update has been written by Andrew Dunn as Gary has been spending some time in Cornwall – holidaying we might add, not making an appearance at the G7.
Blue Sky Investment Market Update
As ever, it feels like there is much going on in the world but up until mid-week, major world markets were much less volatile than of late as the often-quoted summer lull appeared to be taking hold. What happens in the US has always been very important worldwide and never more so than now, with the latest US Federal Reserve meeting.
The Fed disrupted the summer torpor that the markets had settled into by suggesting on Wednesday that two rate hikes could be on the cards by the end of 2023, a year earlier than expected. Remember by ‘hike’ they mean 0.25% which by historical standards is quite modest. Nevertheless, the current market is hyper-sensitive to any change of sentiment even though it was inevitable this time would come.
The US Central Bank concluded its two-day policy meeting by keeping its interest rates and monthly bond purchases unchanged, as widely expected, but this represented a change of approach from the previous meeting when no rises were anticipated before 2024. This led to the dollar looking more attractive and rising.
The Fed cited an improved economic outlook for this changed stance, with economic growth expected to hit 7% this year, adding that the Covid-19 pandemic was no longer a major restraint on the economy.
With US inflation rising faster and the economy recovering, the market had been expecting the Central Bank officials to set out a broad timetable to start to review reducing its bond-buying program. However, this hawkish stance “suggests that the QE tapering discussion could start a little earlier than thought and conclude more quickly” said analysts at ING. “This means that all the focus will be on the Jackson Hole conference in late August as a possible date to formally acknowledge the need to taper.”
All the above changes nothing for now, other than adjusts expectations, and at the point of writing all markets outside the US are very modestly up on the week. Europe has enjoyed several days of small rises and the FTSE 100 appears, for now, to have settled well above the psychological level of 7000.
It’s coming home
We live in hope with the football, but perhaps more likely is a strong UK economic recovery.
Albeit from a low base, we have seen this week the encouraging news that 197,000 new jobs were created last month and that generally, vacancies are at pre-covid levels. Employment and the opportunities this brings for prosperity, well-being and morale are at the heart of a country’s economic potential. Youth unemployment remains a concern but nevertheless, this is good news and shows how quickly a recovery can begin.
The latest updates about our economy showed GDP rising by 2.3% in April, indicating a strong recovery is underway. The main driver here was the perennial service sector, traditionally being 80% of our economic output, suggesting that this broadly remains intact despite so many challenges. Ironically, the same survey showed construction declining by 2% though anyone who has tried to employ a builder or buy DIY supplies may feel this was very temporary indeed. The housing market, so long a bellwether for economic health, has also had a stamp duty fuelled turbo boost. And as we all know, this in turn benefits so many other areas of our economy.
This week also saw inflation rise to just above the 2% Bank of England target level. This was not at all unexpected, with some of last year’s accumulated savings being spent – indeed this is a further sign of the economic bounce back. The Bank of England have restated their view that this is a temporary rise, easing immediate concerns of higher interest rates and the expectation that wages will rise slower than prices in the coming months helps to put a natural cap on inflation.
We remain very aware of the many challenges facing our economy, but these are positive signs, and this has been reflected in the main UK stock markets which have trended gently upwards this last week.
Asset Allocation
Put simply, this is the amount of an investor’s money that is allocated to a particular type of asset – shares, bonds or infrastructure for instance. It is one of the most important elements of successful investing and one our investment committee, rightly, spends a lot of time focussing on. We use a thorough process to maximise asset allocation, internally and with our investment partners, to ensure that within our clients’ risk tolerance, we create consistent returns.
There is an old saying that if you laid all the economists in the world from end-to-end, they still would not reach a conclusion, and this may be equally true of fund managers. Nevertheless, it remains important to understand sentiment and where the world’s largest fund managers allocate money, and why. Bank of America recently published a survey with some interesting results.
Fund managers around the globe continue to position their portfolios with a very bullish slant on growth as the world opens up from the coronavirus pandemic.
The June Bank of America Global Fund Manager Survey offers some insight into the thinking and positioning of 92 fund managers with combined assets of $645 billion.
While the emergence of the Delta variant of Covid-19 has created a headwind, many are confident that the global economy will continue to open in earnest as the vaccine roll-outs progress.
Growth and inflation expectations
Source: Bank of America Global Fund Manager Survey
Economic growth has already rocketed from the low levels posted in the 2020 lockdowns, while inflation has started to rise. These conditions are traditionally seen in the early phase of the business cycle, which we generally see after the end of a recession. We have commented before that the pandemic has likely created the start of a new economic cycle.
Indeed, three quarters of those surveyed are expecting to see above-trend growth and above-trend inflation over the months ahead. However, most managers think higher inflation will be a relatively temporary issue, with three quarters saying it would be short term. This ties up with what the Federal Reserve have been saying too.
Finally, nearly 70% of fund managers do not expect another recession to hit until 2024 at the earliest.
Changing times
We write frequently about the merit of investing Sustainably and how this is increasingly changing the way individuals and companies choose to operate. This week has seen two oil giants (BP and Shell), both reiterate their desire to alter their corporate strategy. What is highly relevant is that this not only rows back many generations of activity but also that as a business wishing to be profitable for their shareholders, this demonstrates where they see growth.
Shell is considering the sale of the largest US oil field in Texas and BP is bidding to build wind farms in the North Sea. With oil prices at 12-month highs, this will act as a reminder of how they became profitable (and will remain their main business activity for many years yet) but also provide the funds to accelerate change, if they wish. It may be a while before any substantive change is truly seen but the efforts are to be applauded as a bold change from the past.
We hope you have a great weekend.
Best wishes
Andrew Dunn 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.
