Global economic recovery has continued with the vaccine rollout making steady progress and restrictions on activity being eased further in most developed markets. Sentiment was set back to some extent over the spread of the more contagious Delta variant of COVID-19 and markets reflected this. A notable feature has been the recovery of government bonds with yields falling in spite of ongoing concerns over high inflation. This in turn benefitted higher growth potential stocks such as those in the technology sector and the trend of ‘value’ stocks outperforming reversed due to the greater sensitivity to economic recovery. Emerging markets have lagged developed markets recently, the MSCI Emerging Markets Index returning -6.70% in July, impacted by weak performance from China where announcements of tighter regulation for several sectors triggered a sharp decline in stock prices and highlighted political risks.
In the US, the concern over the Delta variant has raised the issue of whether the economy is moving past the peak point of growth and the Federal Reserve’s tone since June has indicated that there is a limit to how long they will maintain the current level of stimulus. Declining bond yields may also have been impacted by technical factors with institutional investors rebalancing after a strong period of equity gains and limited bond supply. The general view seems to be that the bond market is not sending negative signals about the health of the economy and that when technical factors are removed, yields will move higher once again. The extent of President Biden’s infrastructure spending ambitions and the prospect of the tapering of asset purchases by the Federal Reserve would be catalyst for a rise.
The economic data from the US has continued to indicate inflationary pressures with the headline consumer price index (CPI) reaching 5.4% year on year in June. Strong recovery in the labour market and ahead of expectation second quarter earnings from most companies provided grounds for optimism on continued economic strength and along with Europe, the US has been the strongest performing major equity market in 2021. In the eurozone, interest rates look set to remain low for a very long period of time and this has been the market’s assumption. With little further leeway to loosen monetary policy, the path from the low growth, low inflation environment that has become entrenched over recent years seems likely to now rely on fiscal policy, the launch of the European Union’s Recovery Fund is intended to do that. Economic data has also offered encouragement for gathering economic growth in the region with rapid increases in business activity. The vaccine rollout has accelerated after a slow start with over 60% of the population of the largest euro area countries having received at least one dose by the end of July.
The rapid progress and high level of vaccinations in the UK means that the country is a test case to some extent, with evidence of a continuing decline in cases and low hospitalisation rates providing an optimistic outlook for global market sentiment and in particular regions with similar levels of vaccinations. With most remaining restrictions related to COVID-19 lifting in July and the evidence suggesting that vaccines remain effective against new variants in preventing serious illness, the growth outlook remains strong. Supply bottlenecks, a struggle to fill job vacancies and a shortage of raw materials have though meant that business costs rose at the fastest pace on record in July. Monetary policy remains supportive but there are signs that some members of the Bank of England’s monetary policy committee have become more concerned about the inflation outlook as UK CPI rose to 2.5% in June year on year.
Similar to Europe, Japan is a market geared to global recvery and should benefit from rebounding trade with support from monetary policy and attractive market valuations. The resurgence of COVID-19 cases and slow vaccine rollout has resulted in underperformance so far this year but with the Olympic games successfully concluded without any major impact on cases and a peak of the current wave expected soon, conditions for improved stock market performance may be in place and should be assisted by further depreciation of the Yen, particularly for exporters.
Weakness in the Chinese stock market has been notable resulting in emerging market equities lagging developed market peers year to date. Increased government scrutiny of the technology sector and the introduction of reforms to the private tutoring sector created volatility and sharp falls in value in the sectors affected. The changes appear to reflect the political objectives of the ruling party to reduce inequality and increase competition being factors. The general view is that the long term outlook for Chinese and Asian equities is very positive but sentiment is likely to be impacted in the short term until the extent of the regulatory clampdown becomes clear.
Most equity markets have already delivered strong gains in the first half of the year, more recently investors seemed to have focused on the risks to the post-pandemic recovery and markets have seen limited progress. The Delta variant could lead to slower growth in countries where vaccination rates are low but there is little evidence at this stage to suggest that there would be any significant impact and high levels of savings amongst consumers are supporting a strong rebound in growth along with central bank and government fiscal policy. The easiest element of the recovery may now be past, particularly in the US, but there seems to remain the potential for attractive returns from equities, albeit with some degree of volatility which can be partially offset through suitable diversification.
|2021 Year to Date|
|FTSE World ex-UK (GBP)||+14.56%|
|FTSE Actuaries UK Conventional Gilt All Stocks||-2.70%|
|FTSE Actuaries/ UK Index-Linked All Stocks||+4.65%|
Performance to 11/08/2021
|Bank of England Base Rate||0.10%|
|Inflation (Retail Price Index)*||3.90%|
* June 2021