Quarterly Investment Newsletter: Summer 2021
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Quarterly Investment Newsletter: Summer 2021
Thu 08 Jul 2021
Developed markets’ continued vaccine rollouts and a corresponding easing of lockdown measures buoyed equity markets during the second quarter despite already starting the period at elevated levels. Global stock markets rose by over +6% in Sterling terms and whilst the US was again the best performing region, European and UK stocks were not far behind. The outlier in developed markets was Japan whose vaccine programme lags well behind that of western markets, while emerging markets were also below average for similar reasons. Gold rallied strongly during the quarter before selling off to end up +2.4%, and Gilts posted a positive +1.2% return as yields remained stubbornly low as a consensus of any inflation being ‘transitory’ seems to have been reached (for now) in markets.
For some time now we have commented that markets were pricing in expectations of lockdown measures being eased, and some sort of return
to normality bringing about better fortunes for corporate earnings. We are now seeing that hypothesis play out in part as a very strong earnings
season went some of the way to justifying stock market valuations. That said, markets remain expensive by historical standards and will rely on the
continued reopening of economies being unaffected by unwelcome virus developments even with the now familiar backdrop of very accommodative monetary policy. Dispersion in fortunes between geographies and sectors remains a pronounced feature of equity markets, with the US remaining the most expensive market by virtue of its weighting to technology firms, and we expect active managers to be able to add value in this environment. By contrast to the US, the UK market continues to look markedly inexpensive as analysts’ expectations for better earnings in financials and industrials go unrewarded, and investors remaining seemingly undrawn to dividend paying stocks.
Lockdown measures in the largest economies are easing, workers are returning to jobs, and though in some areas the Delta variant is leading to an increase in Covid cases, vaccine rollouts mean that this wave of infections is proving less deadly. Vaccine supplies though remain a challenge for large parts of the world meaning that the now familiar economic problems will remain in those countries. While the situation is undoubtedly improving and swiftly so, we concur with the Bank of International Settlements’ view that we will see a “strong but uneven recovery”.
The possibility of higher levels of inflation, and how long these might persist, are the main questions vexing markets at present. For over a decade
extraordinarily accommodative monetary policy has kept financial assets high whilst not fuelling inflation in the real world. That economies have not fallen apart during the pandemic is due to quick governmental action, but at a heavy price in terms of fiscal deficits. The US at least looks likely to continue to spend beyond its income, and with the cost of borrowing presently so low others might be tempted to follow. Such fiscal expansion, cash saved by households during lockdowns, remaining pressures on supply chains, and the growing urgency to tackle climate change are all potential sources of inflation.
At our June meeting the Investment Committee voted to make no changes to our portfolios. We continue to feel that the bond market offers little value and thus maintain our overweight to equities and infrastructure assets. We continue to hold a balance between value and growth stocks, and favour the UK on a valuation basis.
I hope you find this newsletter interesting and relevant to you, and I would very much welcome any feedback you may have. Please do feel free to
get in touch with your thoughts either by phone on: 020 7063 4259, or by email on: david.baker@mazars.co.uk.
-David Baker, CIO
Ding-a-ling. Financial Santa is in the house, but does he also bring rate cuts?
Unlike the real Santa, who brings his gifts late in the year, the Financial Santa, tends to begin a couple of months earlier.
Don’t write off 2023 just yet
After 2022, the annus horribilis, it was widely assumed that 2023 would be a rebound year. However, up to the end of October, a 60/40 (MSCI World/Bloomberg Barclays Global Bond Index), was up a mere 2%, very far from the average uplift of 5% and 9% experienced in a rebound year.
No end in sight
Last Friday, UK GDP came in a tick higher than expected. In this case, a 0.2% surprise is by no means insignificant. The fact that the economy was able to eke out growth in the face of already aggressive interest rate hikes will galvanise the Bank of England’s zeal to continue tightening monetary policy.
Know when to take risks, and when not to
‘Providence protect idiots’ Otto Von Bismarck once exclaimed. I’m never quite sure what the direct intentions of the Almighty are. Bismarck, a Prussian Prince and one of the great leaders of the 19th century, might have had a more direct line of communication with the powers that be than I do.
All quiet on the Western Front. Perhaps too quiet.
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You can relax. The Fed has no intention to fight inflation (yet).
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The latest position of the ECB
Christine Lagarde, President of the ECB, gave a press conference on 10 June following a meeting of the ECB’s governing council. Her speech contained some unequivocally positive observations about the European economy, lamenting a bounce back in services activity, continued strong manufacturing activity and improving consumer spending, all against a backdrop of strong global demand. […]
Is gold a good hedge against inflation?
The problem with gold is that experience does not necessarily support theory. A quick look at the numbers suggests that although gold is widely perceived as an inflation hedge, reality suggests otherwise.
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