Surging activity meets supply bottlenecks and rising costs
The optimistic mood continued with surging economic activity as further progress on the vaccine rollout allowed an easing in lockdown conditions. But with share valuations already anticipating much of this, stock markets made little headway in May before picking up in June. For the period from the end of April to end of June, major stock markets registered gains of 2% to 4%. Emerging markets rose by around 2%, but Asian shares were flat. After a quiet May, bonds also showed small gains in June.
Record PMIs reveal the strain beneath the growth
Global PMI surveys for May and June pointed to increasing activity across manufacturing and service sectors, with sub-indices at record highs reflecting rapid rises in growth and new orders. The flip side of this was a sharp rise in costs owing to a shortage of materials like bricks and concrete, electronics, plastics and metals, as well as a failure to recruit sufficient workers.
Base effects from the previous year pushed inflation higher, with prices in the United States rising by 5% and core CPI hitting a 28-year high of 3.8%. Eurozone CPI at 1.9% tested the central bank target of "below but close to 2%", while UK inflation at 2.1% came within the 1% flexibility band of its central 2% target.
The Fed sends mixed signals on timing
The United States Federal Reserve caused some confusion with mixed messages as it tried to maintain its sanguine approach to inflation while acknowledging that the data was higher than expected. Future Fed projections now implied two interest rate rises in 2023, but Chair Jerome Powell emphasised that these were the opinions of current board members and not Fed policy. He also reiterated that they would not raise interest rates pre-emptively and would wait for evidence of actual inflation or other imbalances before acting.
The regular meeting of the Bank of England's Monetary Policy Committee concluded with no change in interest rates or the level of quantitative easing. The Committee raised its growth forecast and said that it expected inflation to peak at just over 3% later in the year before returning towards its 2% target. Independently, the Bank's chief economist, Andy Haldane, warned that inflation was likely to end the year at close to 4%.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The transitory inflation story gains traction, for now
There has been a shift in the inflation narrative. The higher-than-expected releases were accepted by investors without fuss. Despite headline writers trying to kick up a storm, there was no sense of panic. If anything, the "transitory inflation" story emanating from most central bankers gained credence, with US Treasury bond yields sliding some 25 basis points below their March high.
Inflation remains a tricky call. The over-riding story from the PMI surveys was of supply bottlenecks and rising costs. For now, it is accepted that these supply problems will be ironed out as buyers baulk at the sharp increase in prices and companies find it easier to source materials and new workers. Chinese authorities recently announced a "zero tolerance" crackdown on hoarders and speculators in raw materials, and this took the shine off metal prices, which reversed part of their parabolic 2021 rise.
Short-term interest rates offering negative real returns increases the likelihood of investors targeting sell-offs as an opportunity.
With the pandemic still rampant in Asia, supply bottlenecks, especially in the electronics sector, are unlikely to ease any time soon. There are no quick fixes to the worldwide shortage of shipping containers and the UK's shortfall of lorry drivers. These factors might all prove to be transitory, but in the meantime they could test the patience of investors, if not central bankers, if they push headline rates much higher.
Our view remains that stock market valuations are vulnerable to a setback, but with short-term interest rates offering negative real returns, adjusted for inflation, investors will view lower share prices as an attractive investment opportunity.
Portfolios remain positioned for a mix of outcomes: limited bond duration to manage rising yields, a blend of equity styles, and alternative assets that provide diversification against both volatility and inflation.
Limited exposure to rising yields
Our fixed interest funds continue to have limited exposure to rising yields, as we feel that current levels do not offer sufficient reward for the potential risk of capital loss.
A blend of value and growth
We are holding a mix of value and growth stocks but have sought to minimise exposure to US-listed FAANG names, where valuations have become excessive. Our value stocks have continued to enjoy a strong recovery so far this year.
Alternative assets for diversification
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these alternative assets are funds invested in gold and silver, infrastructure, agriculture and absolute return strategies.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →