05 October 2021
A crisis of confidence?
The continuing fuel crisis, worries about inflation, lagging growth, concerns around the Chinese property market and tough language from central banks about their plans – all of these compounded over the last week to help push down global markets.
Political uncertainty in the US only served to add to the pressure. Having driven billions of dollars into a host of support measures during the pandemic, the US government was swiftly closing in on its debt ceiling. In the absence of any sort of resolution, the government would ultimately shut down and there would be a historic potential default on US debts – both of which would drastically impact investors and bondholders, not to mention the wider global economy. However, on Thursday, the government was able to pass a ‘continuing resolution’ – essentially giving the government a deadline of 3 December to fund a more long-term solution.
The beginning of the week turned out to be particularly gruelling for equity investors, as markets were repositioned prior to anticipated interest rate rises in the future. For example, on Tuesday, the S&P 500 witnessed its worst day since May – falling 2% – with a similar story playing out for the Nasdaq and the STOXX Europe 600, which also both fell over 2% on the same day.
Adrian Frost from Artemis (Manager of the St. James’s Place UK Income and UK & International Income funds) observed that, despite the fact that September can often be a difficult month for equities, there were a number of unusual factors behind this year’s sharp decline:
“The S&P 500 peaked at a record 4,536.95 on 2 September. It is now down 5% (though still up over 14% year-to-date). That’s consistent with September’s bad habit of being the meanest month of the year for equities. Fears about inflation, supply chains, COVID-19, tapering and China’s bubble in property explain the fall.”
Diversify to survive
While the past year has seen US markets broadly posting robust levels of growth, September’s lacklustre performance serves as a timely reminder about the importance of having a diversified investment portfolio in order to help reduce certain cyclical risks.
For instance, while equities have fallen this past week, bond investments have experienced comparatively better performance. Mark Dowding, Chief Investment Officer of BlueBay (Co-manager of the St. James’s Place Diversified Bond, Global High Yield Bond and Strategic Income funds) discerned a growing sense that inflation may not be as short term as previously thought. He went on to note that recent improvements in bond returns demonstrate a rectification of an undershoot from the previous quarters. As central banks taper their asset-purchase programmes in the upcoming months and years, he added, it is acceptable to expect these returns to continue to gain ground.
The UK and EU picture
Heightened gas prices and a shortfall of HGV drivers in the UK – together with a somewhat panicked general public – brought about a shortage of petrol in forecourts across the country for the majority of last week. The crisis unravelled towards the end of the previous week, before dominating the headlines over the weekend, and continuing last week.
The UK faces similar inflationary and interest rate rise concerns as the US, meaning last week’s fall for the FTSE was to be expected, albeit by a lower amount. Indeed, the FTSE had not bounced back as strongly as its US counterparts prior to this, and it continues to be below its pre-pandemic peak.
Likewise, the EU is facing inflationary pressure, with headline rates reaching 3.4% in September. There is an ongoing global debate regarding the nature of this inflation – at first, central banks said it was transitory, yet with supply chain issues stifling supply and energy prices being on the up, some are starting to wonder how long this so-called ‘transitory’ period will go on for.
Jack Allen-Reynolds, Senior Europe Economist at Capital Economics, said:
“Looking ahead, further increases in inflation seem a near certainty. Admittedly, governments have taken steps to limit electricity and gas price rises, but that won’t stop energy inflation from accelerating. After all, double-digit energy price hikes kicked in today in Italy.
“What’s more, we expect to see the impact of high-input costs, including shipping, feed through to core inflation. We now think that the headline rate will reach 4% by November – and even though it is likely to fall sharply next year, recent strong outputs raise the chance at the ECB’s December meeting that it will announce an end to the PEPP [Pandemic Emergency Purchase Programme] in March.”
He forecasted that inflation will come to rest below 2% in 2023.