Quarterly Investment Newsletter: Autumn 2021

Much as we had expected at the start of the summer, equity markets in the developed world traded pretty much sideways for the past three months as corporate earnings rose to justify somewhat the high stock market valuations. Returns for global equities in local currency terms were around 0.7% for the quarter, though UK based investors returned over 2.5% thanks to a sell off in Sterling (mainly against the US Dollar) late in September. Japan was an outlier as a change in prime minister drove sentiment and returns of over 7% in local terms.

Covid-19 factors continue to dominate global economics, either directly in those parts of the world where vaccination programmes are yet to reach the majority of at risk populations, or via the legacy effects of global lockdowns in those economies which have largely now reopened. Pictures of container ships queued outside ports worldwide give a visual insight into the dislocations in global supply chains, while the cost of transporting goods has increased substantially. Frictions also exist in labour markets as countries attempt a return to normality and find transitioning from emergency fiscal support measures to regular employment conditions a challenge. Job openings might be as high as the unemployment rates, but a seamless matching of people to jobs is unlikely particularly in the service sector. Psychological factors are also at play as the pandemic has caused many in the workforce to rethink their work and life priorities. Climatic effects have stoked energy prices, adding to concerns that inflation pressures may be ‘transitory’ for a longer period than first expected.

There are brighter points in the economy. Corporate earnings have improved above market expectations despite GDP numbers not yet recovering to Q4 2019 levels in many parts of the world. While Purchasing Manager Indices (seen to be one of the better leading indicators or future economic growth) are falling, they remain firmly in expansionary territory and the rate of decline is not dramatic. It is reasonable to assume that consumer demand will remain buoyant as the unemployment rate falls and those households which stored cash during the pandemic are freed up to resume consumption in the service sector. Similarly, corporate cash levels are at very high levels, a factor which usually indicates an increase in capital expenditure to come.

Thus markets are confused and jumpy. The link between extraordinary monetary policy (principally Quantitative Easing (QE)) and stock market growth is undeniable, so we revert to a position where good economic news is bad for markets, and bad news is good due to the impact on the probable path for QE and interest rates. The complicating factor now is that much of the bad economic news is inflationary in nature, testing central bankers’ resolve to allow price rises to run unopposed for a period of time. Indeed, the US Federal Reserve has become more hawkish in recent weeks, a position mirrored in the UK if not yet in Europe. Add in issues such as the US debt ceiling, a change in leadership in Germany, and waning equity momentum, and we find reasons to exercise caution even though the economy may be in ‘mid-cycle’.

At our September meeting the Investment Committee voted to reduce any overweight equity positions within our portfolios to neutral. We acknowledge that bond markets continue to look unattractive on a real return basis (after inflation) and therefore allocate the proceeds of equity sales to gold and short dated corporate bonds. We continue to hold a balance between value and growth stocks, and favour the UK on a valuation basis. Autumn 2021

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