MARKET COMMENTARY – NOVEMBER 2021

Global equities recovered in October with many markets reaching new peaks, particularly the US as companies reported excellent earnings which exceeded expectations. Chinese equities rebounded as property sector issues appeared to be moving toward resolution and after several months of substantial underperformance, greater regulatory uncertainty may now be fully factored in to market prices. Fixed income markets remained volatile due to rising fears around persistent inflationary pressures. Short-dated US treasury yields, which reflect expectations of where interest rates will be in the future, reached their highest level since March 2020, as investors believe that inflationary pressures have pulled forward the date of the first US interest rate rise.

Economic recovery generally remains solid. Purchasing managers’ indices (PMIs), a measure which provides evidence of changing economic sentiment, improved in many developed countries and vaccination progress has reduced the impact of pandemic related restrictions in much of the developed world. The combination of strong demand combined with supply constraints caused energy prices to continue to increase in October, in Europe natural gas prices jumped by 60% in a week, though moderated following the Russian President’s intention to increase gas supply, however pipelines are near full capacity so it is unclear if this will resolve the shortage in supply. In Asia, coal shortages prompted governments to take steps to increase production and energy blackouts in China impacted manufacturing.

Despite a slowing in China’s real GDP growth rate, exports over the last year increased as a result of rebounding demand from developed markets and Southeast Asia. The goal of 6% annual growth set by the Chinese Government at the beginning of this year still seems realistic given the positive start to 2021. After the large property developer, Evergrande, made interest payments that had previously been missed in September, investors’ switched their focus to Chinese authorities’ ability to manage regulations in the real estate sector overall.

In the US, President Joe Biden received support following the announcement of new legislation relating to infrastructure spending proposals. Despite disappointing US GDP growth in quarter 3 partly as a result of the persistent supply side disruptions, data released in October offered encouragement that momentum is picking up again. Overall the US recovery is steady and the economy is approaching full employment with inflationary pressures building in several areas of the economy. Consequently, it appears highly likely that the Federal Reserve Bank will announce the start of tapering in November with a view to ending bond purchases by mid-2022. A gradual interest rate hiking cycle could then start towards the end of next year.

In Japan, COVID-19 infections have started to decline and vaccinations are progressing well, enabling the government to ease restrictions on activity. A rise in services consumption and capital expenditure momentum is likely to increase economic growth in the coming quarters.

Euro area inflation has risen to its highest level in 13 years however the European Central Bank reiterated during their October meeting that it expected the current rise in inflation to be transitory and a decision on asset purchases was postponed until December. In Germany, the unexpected resignation of Bundesbank’s President triggered speculation and ultimately the prospect for cheap funding conditions in Europe to continue for longer. Italy and Spain, the main beneficiaries of European Union resources, announced their intentions to pursue expansionary fiscal policies and postpone fiscal consolidation until much later in the recovery. The issuance of green bonds (focusing on climate change policies) by the European Union received support which should provide a further boost for the momentum behind green bonds, a market which may provide high quality diversification opportunities for fixed income investors. On the political front, a coalition between the centre-left SPD, the Greens and the liberal FDP is the most likely outcome of negotiations in Germany and proposals include a minimum wage increase, social initiatives, and spending on digitalisation and climate policies.

In the UK, the labour market remains robust with unemployment falling to 4.5%. With the Bank of England growing increasingly cautious of rising wage pressures and the impact on inflation, a first interest rate increase this year has been considered likely, however the Monetary Policy Committee surprised markets by keeping rates on hold at its October meeting, sparking a fall in bond yields and the value of sterling.

While seeing improved performance in 2021, the UK stock market has lagged most other developed markets since the Brexit vote. Attractive valuations and dividend yields, which have recovered more strongly than anticipated, may now encourage global investors to return to the market. The two key drivers of the UK economy, consumer and business spending, are expected to continue to support UK economic growth through 2022.

Although infection rates remain significant and the risk of new variants emerging remains, as vaccinations rates have improved globally, investors have changed their focus to a post-pandemic process of normalisation. Despite ongoing supply chain constraints and fears of persistent inflationary pressures weighing on the path of recovery, the general consensus is that a scenario of stagflation (slowing growth and inflation) can be avoided. The growth outlook is supported by high levels of demand, healthy corporate balance sheets and robust investment intentions. In this environment, equity markets should have room to continue to make progress while rising yields could support a rotation towards more value-oriented sectors of the market. The relatively high level of equity dividend yields remains an attractive source of income.

From an environmental, social and governance (ESG) perspective, the 26th “Conference of the Parties” (COP26) is taking place in November and is a gathering of all the countries signed on to the UN Framework Convention on Climate Change and the Paris Climate Agreement. This event may result in an increased market focus on ESG factors, and a widening gap between winners and losers across sectors.

Total returns in GBP to 31/10/2021

* September 2021

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.