Ken Baksh investment view October 21
Written by Charlie Palmer on 02/08/2021

October 2021 Market Report

 Investment Review

During the one-month period to 30th September, major equity markets, as measured by the aggregate FTSE All – World Index, fell moderately, with one noticeable exception. Japanese equities rose by 5% while other bourses dropped by between 3% and 5%. The UK narrow and broader indices both outperformed the average, partly due to the sector mix  .  The VIX index rose sharply to a level of 23.25, now virtually flat over the year to date, reflecting increasing caution. Government Fixed Interest stocks exhibited sharp upward yield moves (see below), the US 10 year for instance, closing the month at a yield of 1.52%, while the UK Government All Stocks Index fell to a level of 178.9, now down over 8.0% in capital terms since the year end. Other bonds also fell price terms during the month. Currency moves featured a stronger dollar and weaker pound, while commodities, with the obvious exceptions of oil and natural gas finished the month in negative territory.

.In terms of global economic data, there have been few official GDP growth revisions in the most recent period, after the strong second quarter rebound, in both developed (especially China and USA) and emerging economies, although more “live” data suggest some softening in USA and UK for example (see below). Inflation indicators however, at least in the short term, have moved upwards for any number of well documented reasons, the latest OECD forecasts being 3.7% and 3.9% for 2021 and 2022 respectively. The IMF latest report predicts 6% global growth this year falling to 4.4% in 2022 but highlights the considerable regional variation. COVID-19 developments during the month featured accelerating cases in some areas (Northern autumn, school return) and a growing debate re the global distribution of vaccine. Uneven vaccination rates and levels of lockdown stringency (enforcement and adherence) continue to influence government support measures and Central Bank actions. The tone of the very recent Major Central Bank meetings has been more “wait and see” re relaxing QE and interest rate moves, although a number of other economies e.g Norway,Hungary,Brazil,South Korea, have already started raising  policy rates.



Recent US Federal Reserve meetings have moved the emphasis from unrestrained support for growth and financial markets to the long process of winding down stimulus and eventual tightening. At last week’s meeting, Jay Powell said that the Fed could announce a “taper” of its asset purchases in November, with a possible end to the bond buying programme by the middle of 2022, while half of the committee also expected interest rates to rise as soon as next year.

 Recently announced inflation indicators showed headline CPI to end August rising at 5.3% over the year, marginally below some expectations. Provisional second quarter GDP growth of 6.5% was lower than some estimates, but still well above trend. Recent consumer sentiment indicators and provisional PMI figures have all shown a pause in activity/expectations.   Independent economic forecasts are now expecting over 6%-8% GDP growth for full year 2021 with unemployment ticking down to around 4.5%. 


Recent ECB meetings have seen interest rates maintained at -0.5% and a continuance of the pandemic bond buying programme, a subject of growing debate. It is currently expected that more definitive statements re QE and monetary policy will be made at the November/December meetings. Official second quarter GDP figures and very recent European sentiment surveys have pointed to a varying but generally positive, and better than expected trends for the last four months (see graph below), after the widely expected first quarter economic decline, with the area currently expecting to have at least 70% of the population partially vaccinated by Q3 2021. The interim composite PMI for August, just released, reached a level of 59.5, near its highest level since 2012.

The EU commission currently expects 4.8% economic growth this year. July Eurozone inflation stands at 2.2 % (Germany,September 4.1%!) and surveys suggest that many companies are likely to pass more factory gate price increases to consumers as the year progresses. Some analysts expect the inflation rate to peak at over 3% later this year, well above the current ECB forecast. Political   developments have been dominated by Germany, where the SPD have overturned the long-standing CDU domination. A period of horse trading now to be expected before final coalition, but some of the more extreme political combinations are ruled out. An SPD,Green, FDP combination currently seems the most likely combination. Renewable energy, infrastructure spending and a relaxation of fiscal “rules” are likely to dominate investor interest, whatever the eventual coalition breakdown.


 


Asia excluding Japan, led by China (across all sectors and property), continues to remain in reasonable economic shape although the recent news flow has been dominated by Covid issues and specific Chinese events, both corporate and geo-political. On July 20th the ADB released a pan-Asian 2021 growth forecast of 4.0% (compared with a projection of 4.4% earlier this year), with significant country variation e.g Vietnam against Thailand, the latter very dependent on tourism. Recently, South Korea become the first big Asian economy to raise interest rates since the start of the pandemic as record household debt and soaring property prices eclipsed fears over struggles to contain the Delta covid variant.

 

China is experiencing some weakness after a positive start to 2021 with July industrial production, factory output, retail sales, investment spending, property transactions all weaker than expected. Some “self-imposed” factors e.g., curbing steel making for environmental reasons have accompanied flooding, virus breakouts, power shortages and related restrictions and the PMIs for August, released recently, were well below expectation, particularly in the services sector. At the time of writing, Evergrande, the major property development company, moves closer to bankruptcy, with implications for the sector, bond spreads and Government policy. Stock market investors have also experienced regulatory crackdowns, affecting a variety of sectors e.g online tutoring, video gaming, property development, luxury goods and private equity, to name a few. 

 


While there have been no major changes in Japan’s economic trajectory, politics have moved more centra stage with the appointment of a new head of the Liberal Democratic party, Fumio Kishida. The most immediate task of the new leader is to lead the party into a lower house election, that must happen before the end of November. The main economic impact is likely to the continuation/acceleration of a huge stimulus package. The economy grew at an annualised rate of 1.3% in the second quarter higher than some forecasts but still low relative to other G7 countries. At corporate level however, shareholder activism is rising and some of the undoubted value in the market is being unlocked by private equity and other transactions. 

Within the UK, live activity data shows a clear pause in activity following the buoyant second half recovery for several reasons, and certainly a change in the mix of the growth drivers e.g volume of retail sales versus corporate hospitality. The composite PMI Index covering August showed an unexpected drop to 55.3, both services and manufacturing, citing staff shortages and other supply constraints as the major reasons, while the more recent “Flash PMI” for September showed a continuation of this downtrend. A skills/age, geographical mis match following the imminent end of the furlough scheme, possible Universal Credit top-up withdrawal, HGV driver shortage, scheduled utility bill increases, shop prices and merchandise availability, tax/NI hikes, upward interest rate pressure, pension triple-lock suspension and lingering COVID concerns will inevitably lead to more economic uncertainty over coming months.

The Treasury’s average of forecasts suggests that the economy will grow by 4.4% this year and 5.7% in 2022, after -9.9% in 2020. The average of leading independent economists now expect growth of 5.5% for 2021), lower than earlier year estimates and leaving GDP still short of pre-pandemic levels. 

Forward looking independent economic growth estimates cover a wide range, as the positive argument of relief/catch up spending, by an element of the population from records savings (11.7% estimated by ONS for Q2 2021)  has to be balanced against  the factors laid out above.

 

 

 The minutes of the most recent MPC meeting and a speech by Andrew Bailey have reinforced the more hawkish tone, indeed suggesting the that the MPC was ready to raise interest rates before Christmas, if needed, to prevent higher inflation becoming persistent.

 More intangible in nature, the pandemic also seems certain to amplify global inequalities (regional, medical, employment, poverty, demographic) which could manifest in growing social unrest. Recent surveys by CSFB (millionaires) and house price trends on both sides of the Atlantic (ONS, NAR and ECB) provide statistical evidence of the above bifurcation.

  


Equities

Global Equities showed moderate falls over September 2021, the FTSE ALL World Index registering a decline of 3.1% in dollar terms. The Japanese Nikkei Index was the only major bourse ending the month in positive territory. The UK indices, though still down on the month, performed relatively well, largely due to the energy sector. Chinese equities continued to slide, now down significantly since the start of the year, also contributing to the year-to-date decline in the general Emerging Market space. The VIX index rose sharply, ending the month at 23.25, virtually erasing the year to date fall in one month.