The growth problem is not a lack of demand but one of insufficient supply
Rising energy prices saw inflation replace the pandemic as the prominent investment concern in September, leading to falling share and bond prices around the world. Stock markets ended the month down 2-3% in sterling terms, with prices continuing to slide in early October. The sell-off was in part driven by a rise in government bond yields amid investor concerns over imminent central bank tightening, higher inflation and a fiscal impasse in the US Congress. The UK indices fared better, easing only 1% lower, and Japanese shares rose over 4% on a surge of optimism over the new prime ministerial appointment.
Supply disruptions and labour shortages weigh on growth
Global economic growth continued in September, albeit at a generally slower pace than the initial post-lockdown phase. Further disruption to supplies, together with a shortage of labour, caused input cost and output price inflation to quicken and new orders to slow. Inflation in the US remained above 5% and in Europe hit a 13-year high at 3.4%. As unemployment rates in the US and UK fell, it was noticeable that vacancies continued to rise. With most furlough schemes now ended, the coming months will reveal whether this alleviates the shortage of workers; if not, then wage inflation will become more likely.
Government bond prices fell by 4-5% in the UK. The US Federal Reserve took a stronger line at its regular meeting by suggesting that tightening, in the form of tapering its monthly bond purchases, could start in November and be completed by mid-2022. This, together with more hawkish comments from Chair Powell, shook a complacent bond market, which also noted a tougher tone emanating from the Bank of England. Money markets began discounting a rate rise in the UK by February 2022, with a second rise in August.
Changes at the top in Germany and Japan
Politics saw changes at the top in Germany and Japan, with the former struggling to form a new coalition government, while Japanese shares reacted positively to the new prime ministerial appointment. Canadian Prime Minister Trudeau returned in charge of a minority government.
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 prospect of stagflation enters the conversation
The parabolic rise in energy prices has raised the prospect of stagflation-like risks, where rising prices are accompanied by sluggish economic growth. The record rally in gas and power prices across Europe has already forced some factories to halt production. For others, the higher input costs will hit profits, undermining the earnings priced into market valuations.
The shortage of labour and supply bottlenecks extend well beyond the UK; from a global perspective, one can substitute a shortage of cargo ships for lorry drivers. Industry surveys paint a picture of delayed orders, a struggle to get hold of components and a lack of skilled workforce. These bottlenecks have previously been viewed as temporary, and part of the "transitory" inflation argument. The concern is that in some areas there is no quick fix: building more cargo ships or opening new mines will take years rather than months.
For now, the growth problem is not a lack of demand, with jobs plentiful and high levels of savings, but one of insufficient supply. We face a backdrop of higher energy prices over the winter with the prospect of higher taxes in April; add in the potential for a rise in interest rates and we could see a squeeze on consumer spending and corporate margins.
The level of unknowns has increased and the prospect of higher-than-expected inflation with slowing growth runs the risk of central bank policy errors.
We remain broadly positive on the growth story but feel that the balance of risks is changing. We are still looking for a market sell-off as an opportunity to invest further but feel there is no urgency in the current climate. Over the longer term, we continue to believe that interest rates will remain low and unlikely to offer a return above inflation. Equities will remain volatile but offer the best long-term prospect of producing a return above inflation.
Portfolios remain diversified across a wide range of assets, with limited bond exposure and careful positioning between value and growth, while we continue to research additional opportunities for when markets present them.
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. This was borne out when most of our funds were only slightly lower during a poor month for bonds.
A balanced mix of value and growth
We are holding a mix of value and growth stocks but have sought to minimise exposure to US-listed technology giants, where valuations have become excessive. We have been researching additional funds to add when markets present an opportunity.
Japan and international diversification
Our Japanese and Russian funds gained over 4% during September, providing a useful counterweight to weakness elsewhere. Our gold and silver fund detracted from performance during the month.
Diversification through alternative assets
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 & 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.
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