19 October 2021
A series of strong results posted last week was the perfect antidote to recent investor anxieties over inflation and support constraints. As well as these results – which exceeded market forecasts – a bounce-back from last week’s tough trading period further soothed investor sentiment.
In the US, the S&P 500 and Nasdaq both posted 1.7% increases on Thursday – for the former, this represented the biggest single-day increase since March. That said, both remain well below the historic highs they clocked earlier this year. While this bounce-back was undoubtedly good news for investors, they will still have one eye on a number of potential concerns lurking in the periphery.
Of those, the issue of inflation is perhaps the most pressing. Midweek, the Bureau of Labor Statistics announced US headline inflation in September went back up to 5.4%, the 13-year high attained in the summer. Although the Fed and other central banks have argued these rises are transitory, there’s increasing pressure to act on it.
This could include raising interest rates and slowing the rate at which the US government is purchasing securities – indeed, minutes from September’s meeting suggest the Fed could begin to moderate the rate of its asset purchases soon.
But inflation isn’t just a hot topic in the US. Back on home soil, many are anticipating the Bank of England (BoE) will look to raise interest rates sooner rather than later if inflation persists above 2% for much longer. That said, September’s inflation figures are not due out until next week.
Alistair Wilson, partner at TwentyFour Asset Management, noted:
“Investors face more challenging markets, and rates are a contributing factor; traders are now anticipating a BoE base rate of 1% by the end of next year. Meanwhile, interest rate swaps are pricing in the first change in monetary policy from the Fed in September 2022. In addition, an easy resolution to supply-chain disruption looks increasingly unlikely, and the UK looks particularly vulnerable due to a lack of HGV drivers – again, an issue unlikely to see a quick or permanent solution. All of this is feeding into the inflation debate, with even Fed members beginning to doubt their ‘transitory’ message.”
Despite these worries, investors reacted positively to recent earnings, leading the FTSE 100 to enjoy its best week in months last week to hit a post-pandemic high. While high energy prices have been felt negatively on some segments, they have benefited others, notably BP and Shell – two large companies on the index. BP, for example, has experienced double-digit growth over the past month.
The recovery of energy firms is a handy prompt of the importance of diversifying an investment portfolio.
It’s also a reminder to have a long-term outlook on investments. Many retail investors fall into the trap of investing with a short-term outlook, as EdgePoint portfolio manager Jeff Hyrich describes:
“While society continues to make advancements in many areas, one area that’s going backwards is people’s attention span. In financial markets, the average holding period for U.S. stocks by retail investors has declined from eight years in the 1960s to less than five months as at August 2020.
“Although we know that having a long-time horizon is extremely important for long-term success, the average holding period for investors has shrunk by 95%! Most self-made fortunes are largely the result of owning and growing a business over years, possibly even decades, but surely not mere months. Stocks represent ownership interest in a business, not just pieces of paper to speculate on in the marketplace.”
The UK and US market performance was echoed in the EU, where worries around inflation, high energy prices and supply chain issues had weighed down on markets in recent weeks. Last week, however, as a number of companies began to post better-than-expected results, markets were lifted. Overall, The STOXX Europe 600 grew by over 2% over the week – but it must be noted that it remains below its mid-August peaks.
The Evergrande effect
It would be amiss to discuss global markets without referencing the events in China. Regulatory crackdowns and the more recent liquidity troubles at construction giant Evergrande have left investors nervous.
Last week the People’s Bank of China renewed a ¥500 billion medium-term lending facility as it looked to ensure the country’s financial system had enough liquidity. Bloomberg has reported that the government was also loosening restrictions on home loans for some of its largest banks, as the government looks to restrict the fallout from the Evergrande problems.
EdgePoint and TwentyFour are fund managers for St. James’s Place.