Please find below our interim Investment Market Update as at 30th July 2021.
Blue Sky Investment Market Update
The S&P 500 hit an all-time high this week, counteracting fears over the negative impact of the new covid variants.
Second quarter results have been spectacular with a huge percentage of companies beating estimates. Bloomberg reported that Apple, Alphabet and Microsoft all beat second quarter estimates.
- Apple still expects strong double-digit growth in this third quarter. Sales jumped 36% in the last quarter.
- Alphabet’s quarterly sales surged to roughly $51 billion, topping estimates. Google had higher digital ad sales, echoing similar results reported last week by Twitter.
- Microsoft sales and profits beat expectations for the 10th straight quarter.
Then comes a wave which catches everyone out!
Amazon disappointed the markets yesterday after missing revenue estimates. These were the first results under the new CEO, Andy Jassy. Investment markets didn’t like the news and equities retreated.
In some ways this is good news. Slowing growth in Amazon is an indication that consumers are gradually returning to pre-pandemic shopping habits. The markets just don’t like it in the short-term!
A wall of money
According to FT.com, investors have ploughed half a trillion dollars into US Exchange Traded Funds (ETFs) in less than eight months. This has surpassed last year’s record and reinforces the surge in confidence in the recovery. Net inflows into US listed ETFs are running at $505 billion so far this year, topping the total for 2020 by $1 billion, according to CFRA, a data and research service.
The economy isn’t bad either!
US economic growth rose slightly in the second quarter to 6.5% on an annualised basis. However, this was weaker than expected as strong consumption was offset by lagging private investment. The data from the US commerce department this week fell short of consensus forecasts of 8.5% growth on an annualised basis and was only just higher than the 6.3% increase during the first quarter.
Despite the disappointment, the second quarter rise in GDP, which was partly fuelled by Joe Biden’s $1.9 trillion stimulus package, brought US output back above its pre-pandemic level for the first time since Covid-19 struck.
Labour shortages, supply chain disruptions and inflation have all been flagged as factors that could weigh on economic activity, along with a resurgence of Covid-19 in some parts of the country, although consumer spending has been strong.
Stimulus could soon be slowing down
Whilst the US economy may not be growing quite as strongly as expected, it is still powering forward. This is reinforced by the Federal Reserve’s attitude which indicates that they are moving a step closer to the day when it will start slowing its massive monetary support for the US economy. This sentiment was evident following a meeting of policymakers and according to Bloomberg, the rhetoric highlighted both the promise and the perils of the American recovery.
At the end of a two-day meeting on Wednesday, the Federal Open Market Committee declared that it had made ‘progress’ towards its goals of full employment and 2% average inflation, even though it was not yet sufficient to merit any policy action right now. The statement marked the first milestone in the US central bank’s steady drive towards a decision on reducing its $120 billion in monthly debt purchases at future meetings, a move that could come later this year or early next year. However, the central bank has said any such ‘tapering’ would require additional improvements in the economy and Jay Powell, Fed chair, said there was more ‘ground to cover’ before it acts.
It’s not just the US that is in good shape
According to Bloomberg Economics, the world economy will see a continued recovery in the second half of 2021, despite the impact of the delta variant. Of course, the US is the biggest economy in the world and so, in part, it follows that the global economy will benefit. Europe and India are both showing strong signs of a recovery.
There may be headwinds of course, mainly around an increase in Covid cases which may create a drag on certain sectors of the economy but, at the moment, the signs are encouraging for the global economic landscape.
An update on Sustainable investing from Phoebe and the team at LGT Vestra
As inflation rises, how will sustainable companies fare?
Last week, the CEO of Unilever commented that his business was facing the fiercest inflationary pressures in a decade. The costs of raw materials, packaging and transport increased dramatically. In response to these rising costs, the CEO suggested that price increases of end products across their portfolio would be hard to avoid in order to protect the company’s margins.
Unilever is one of the top 10 companies across the LGT Vestra Sustainable portfolios. Interestingly, a company’s ability to protect margins from increasing input costs is a theme we are seeing across a number of the businesses held in the sustainable portfolios and we would argue that is one of the benefits of an investment process that prioritizes selection of companies with strong sustainable credentials.
We look to hold quality businesses with strong financial credentials and barriers to entry such as a strong brand, differentiated products and a loyal customer base. The inherent characteristics of sustainable stocks bring price protection as part of its competitive advantage.
Another example of this is ASML (Advanced Semiconductor Materials Lithography), a high-tech semi-conductor business, which reported its earnings last week. This company is held in the Henderson Global Sustainable Equity Fund. Similarly, Trane Technologies and a company called Croda, are also examples of companies with embedded pricing protection. These are both held in the NinetyOne Global Environment Fund.
Other fund managers such as Impax, who invest in industrials and materials with an emphasis on the green transition, also believe these companies are able to pass on a rise in input costs and demand driven pricing power. These companies are also able to outperform in an inflationary environment.
Comment from Blue Sky
Strong global growth is firmly underway but there is a drag on economic performance across many sectors still due to the uncertainties of Covid-19 and its variants. Central banks are poised to act in reducing quantitative easing but don’t want to react too soon in case there is a relapse in the pace of the recovery. Ironically, stronger global growth will bring inflationary pressures but perhaps we are in the eye of the storm in many ways because we are experiencing stronger growth, but we also have the impact of Covid-19, meaning there is an adverse impact on supply chains, input costs and the availability of workers.
The ‘inflation’ word is at the forefront of any economic forecast and central bank considerations. We have carefully positioned our portfolios to firstly protect them against inflationary pressures but secondly, to take advantage of inflationary rises wherever possible, without being too polarised in our stance.
Have a great weekend.
Gary and the Investment Team
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.