Global equity markets have been retreating throughout September on renewed fears of inflation and uncertainty over whether central bank support will soon start to be withdrawn. Ongoing concerns over supply chain disruption are certainly not helping, and are adding to inflationary pressures.
According to a number of leading analysts, this disruption will not be resolved anytime soon. We are therefore likely to experience further upheavals, as well as microchip shortages and the unavailability of certain food products.
In the UK, official figures show that the increase in the cost of living – as measured by the Consumer Prices Index – hit 3.2% in the year to August. Another major factor driving inflation is the substantial rise in crude oil prices, the primary consequence of which has been to propel petrol prices at the pump skywards.
Next week, the attention of traders and economists will inevitably be on the US Federal Reserve Bank meeting. They will be watching for any signs that chairman Jerome Powell might have changed his position on inflation: up until now, the Fed has maintained that the spike we are currently seeing will be short-lived and that it will soon fall back to its long-term target rate of 2%.
Most traders see little chance of the Fed announcing any tapering of its current bond-buying programme any time soon. The main reason is that the latest economic data from the US has been somewhat mixed (and that includes the recent disappointing jobs report).
Surprisingly, however, the European Central Bank has recently decided to put the brakes on its pandemic stimulus programme, and has slowed down its bond purchases amid surging inflation and strong economic growth. Nevertheless, it was quick to clarify that the move was less of a “tapering” and more of a relatively small monthly adjustment.
Recent surveys have shown that millions of workers in a post-Covid world have started to reconsider what they want to do in life and are planning to change careers in a bid to achieve a better work / life balance. Perhaps one of the most important realisations to emerge from the pandemic is that the lifestyles to which we are all accustomed can be turned on their heads very quickly.
The resulting re-evaluation of what is important in life has hit consumer services – restaurants and high street stores, for example. This in turn is creating significant staff shortages as people shy away from these economically sensitive sectors.
Although the world economy has recovered impressively since the gloomy days of March 2020, there are now some signs that the recovery is tailing off (and indeed slowing down). Indeed, recent economic data suggests that the US and China – the world’s two largest economies – may be entering a period of economic retraction rather than expansion.
This is slightly worrying for central bankers and government officials: if economic growth starts weakening just as inflation is starting to soar, then the storm clouds of stagflation could quickly gather and stall the economy. Stagflation is always unwelcome news: subdued global economic growth hits jobs and wages at a time when rising prices begin to squeeze family budgets.
Evidently, Covid-19 has a very long tail and significant chunks of the world population are still caught up in it – particularly those countries which have been slow to vaccinate their populations. And as the Delta variant spreads across the globe, it is becoming clear that the pandemic is far from over. But as increasing numbers of enhanced vaccines are announced, there is little doubt that the world is better able to tackle the virus than it was back in March 2020.
With the fastest period of economic recovery in financial history now firmly behind us and the continued accommodative support of the central bank still firmly in place, the equity markets will most likely continue to deliver some exciting returns – albeit while having to withstand some measure of volatility.
Indeed, the continued spread of the Delta variant and China’s decision to adopt a more regulatory stance in relation to some of its sectors have created uncertainty. And this has weakened some markets – particularly those in the Pacific Rim.
The next few months will see important elections held in Germany and Japan. These will have ramifications for the whole Eurozone as well as the Japanese economy. And before that, whatever is decided on Capitol Hill as the debt-ceiling deadline approaches is also likely to create a number of bumps in the road.
All the above notwithstanding, we still believe that the markets are investable. Furthermore, the pace of policy changes will be so gradual that it will not run the risk of derailing either the current – slightly fragile – global economy or the global equity bull market.
We therefore expect the leading central banks to continue to support growth by keeping interest rates lower for longer. This is positive for equity markets, particularly some of the cyclical and value areas of the market.
Ultimately, we would expect equity markets to finish the year on a strong trajectory. But selective buying will be important, since there are likely to be disappointments on some markets. We also feel that the developed markets of the West will show more resilience towards those bumps in the road than some of those in developing countries – which are likely to be more affected by factors such as China’s regulatory stance.
Overall, we remain bullish on equities as opposed to bonds and excited about the opportunities being offered by disruption, innovation, changes in people’s lifestyles and consumer patterns – all of which will create new investment prospects.