12 October 2021
The US Senate approved a deal to extend the government’s debt ceiling – the COVID-19 crisis saw government debt increase dramatically, to the point that the US government was at risk of running out of money by 18th October. While these fears have weighed heavily on investors in recent weeks, there was the worry that Republicans would be able to block any vote on an extension via a filibuster.
A deal between the two parties was agreed early on Thursday however, which paved the way for a vote on extending the public borrowing limit by $480 billion – enough to keep the government funded until December, and the catalyst for US markets to rise through the second half of last week.
Without a compromise deal, the US risked a government shutdown, leaving hundreds of thousands of US workers without salaries and potentially curbing the economic recovery. Now though, the government has time to agree on a longer-term solution, and potentially make progress on Biden’s infrastructure bill.
An uptick in the market is no surprise, therefore – and the S&P rose to within 3% of the record high it reached at the start of September, while the Nasdaq responded well but remained further from its end-of-August record high.
There does remain, however, the possibility of a return of these fears, given that the deal only sures things up until December – meaning the volatility that has affected global equities in recent weeks could return before the end of the year.
Outside the US
Across the rest of the world, many countries have been struggling with rising energy prices – a catalyst to cause other prices to rise, too. Combined with already strained supply trains, this presents a difficult economic situation.
While it may not feel like it right now, Adrian Frost from Artemis suggests that this trend could favour UK equities in the coming months: “A period has begun that is quite different from recent years, with companies facing higher costs and quite likely an end to the ultra-low cost of money. Much has been written about the demise of the UK market relative to other markets, mainly the US. The UK market has not been the land of tech, unicorns, and wide-eyed valuations.
“[However,] that tailwind may become a headwind, and the balance may be tilted back to the more mundane but undervalued world of companies that make ‘stuff’ and make money today. In that respect, the UK should find greater favour with investors.”
The FTSE 100 ended the week up 1%, although it remains just under 2% below its 2021 high, recorded back in August.
East Asia has also been suffering from the energy crisis, reflected in struggling markets over the past week – despite an uptick off the back of US debt news. Investors also remain nervous around the Chinese central government’s recent tough regulatory line.
Greg Lagasse of EdgePoint Wealth Management, who spoke to St. James’s Place last week, suggested that the market has now priced in some of the regime risks, which could present an opportunity for investors. He said:
“Alibaba is one of the businesses we are interested in currently. This is a business that effectively controls Chinese e-commerce, which is obviously an area with enormous potential. We’ve recently seen a lot of regulatory headwinds and the Chinese Communist Party’s five-year plan, which have weighed on Alibaba’s share price.
“Because the market has focused on the negatives, you can currently buy the business, which is capable of growing at roughly 20% a year, for 14x last year’s cash flow. That is something you won’t find anywhere else in the world – a mega-cap technology business growing at that sort of rate, for that valuation.”