WeeklyWatch – US avoids government shutdown while shortages continue around the world

12 October 2021

Stock Take

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.

Asia fears

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.”

Wealth Check 

In his first public statement since taking the job last month, the Bank of England’s new Chief Economist, Huw Pill, has admitted that high levels of UK inflation could persist for longer than expected, saying that “the current strength of inflation looks set to prove more long-lasting than originally anticipated.”

The Bank of England recently said that it expects consumer price inflation to reach 4% later this year – well above its target of 2%.

What higher inflation means is that your money needs to work harder to not lose purchasing power. For those with large amounts in cash, this may be a problem while interest rates remain below inflation – although its flexibility, liquidity and security mean cash may still have a place in your portfolio.

And for those with investments in equities, inflation isn’t necessarily a bad thing – on one hand, it does mean your money needs to work a bit harder and earn slightly higher returns to remain above inflation. For some companies, too, it might reduce profits if they are not able to pass on price increases to their customers.

On the other hand, higher inflation often helps to improve a company’s debt situation, and many companies can pass on increased costs straight to the consumer – in mobile phones, insurance, and utilities, for example.

This is one of the reasons that diversification is so important. No one sector will be a top performer forever, and as inflation increases, some investments may perform better while others may require some adjustment.

At Wellesley, we create a personalised and well-diversified portfolio that’s completely bespoke to you and matches the risks that you as an investor are prepared to take. With a regular review, we will ensure that your portfolio is adjusted to reflect the ever-changing needs and markets.

Speak with Wellesley Wealth Advisory to learn more about this topic and how our fund managers can position your investments for the future.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested. 

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society, as the value and income may fall as well as rise.

The Last Word 

“It finally feels like we are seeing light at the end of a very long tunnel.”

Sean Doyle, CEO of British Airways, on the UK’s decision to ease travel restrictions last week.

The information contained is correct as at the date of the article. 

Artemis and EdgePoint are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate, or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of Wellesley Wealth Advisory.

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