During the one-month period to 31st July, major equity markets, as measured by the aggregate FTSE All – World Index, displayed a mixed performance on renewed COVID/global growth/inflation/Chinese regulatory concerns. Major weakness was experienced amongst Chinese equities and related Asian/Emerging Market Indices. America and Europe rose slightly, while the UK showed negligible net movement. The VIX index rose quite sharply to a level of 18.5 though still down 18.7 % from the beginning of the year. Government Fixed Interest stocks, rose in price terms, the US 10 year for instance, closing the month at a yield of1.23%, while the UK Government All Stocks Index climbed to a level of 186.6 up 2.54% on the month, though still down 4.26% in capital terms since the year end. Other bonds also rose in price terms. Currencies showed relatively small moves during the month under review. Commodities were generally mixed in relatively low volumes.
In terms of global economic data, there have been few changes to 2021 aggregate GDP growth forecasts, with upgrades to some developed nations (especially Europe and USA) and reductions in certain emerging market economies. The World Bank produced a January forecast of 4% 2021 world economic growth, followed by the OECD estimate of 5.6% 2021 growth, published mid-March. 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 firstly an accelerated roll out of the key vaccines, but also high levels of cases and deaths in India, Indonesia, parts of Europe and Latin America, localised breakouts in Asia/Australia and the dominance of more transmissible, very evident in UK infection data. Uneven vaccination rates and levels of lockdown stringency (enforcement and adherence) continue to influence government support measures and Central Bank actions. There are growing divisions within the FEDERAL RESERVE, ECB and the MPC regarding appropriate interest rate and QE action. The BIS cautioned that developed market economic growth would outstrip emerging economies for the first time in many years.
One sobering thought is that, at the time of writing, a small percentage of the world ‘population have received a vaccine of any sort. The chances of reaching global herd immunity before late next year appear small and, of course, if the virus remains rife, the risk of dangerous variants emerging remains high. Pharmaceutical companies are becoming more pro-active, and indeed some countries e.g Israel are already starting third vaccinations,as the global pandemic remains far from beaten.
Recent US Federal Reserve meetings have reiterated the adoption of the new monetary policy strategy that will be more tolerant of temporary rises in inflation, cementing expectations that the US central bank will keep interest rates at ultra-low levels for an extended period, as well as maintaining bond purchases. However, at the June/July meetings, a slightly more hawkish tone has emerged,as “targets” (inflation and employment) are in sight and it seems increasingly likely that the date for tapering of the QE programme will be brought forward. Recently announced inflation indicators showed headline CPI to end June rising at 5.4% over the year, while provisional second quarter GDP growth of 6.5%, just released, was lower than some estimates. Independent economic forecasts are now expecting over 6%-8% GDP growth for full year 2021 with unemployment ticking down to around 4.5%. The economic debate is now shifting to Biden’s latest plans covering infrastructure, research and development, clean energy, education, and social programmes, as well as longer term tax raising measures (corporation tax, capital gains tax, selective higher income tax etc).
At the ECB December meeting the emergency aid programme was increased, and the 1.8 trillion Euro loan approved. More details, at national level on the disbursement of these funds have recently emerged from the larger countries. 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.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 EU commission currently expects 4.8% economic growth this year. July Eurozone inflation stands at 2.1 % (Germany 3.1%!) and surveys suggest that many companies are likely to pass more factory gate price increases to consumers as the year progresses. On the political front, a relatively quiet period although appointment of new German chancellor this autumn, and the French parliamentary elections (main parties receiving shocks recently) next year will receive increased attention going forward.
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 Indian Covid issues, virus outbreaks elsewhere, new Vietnamese variant, Taiwan specific semi-conductor developments and growing Hong Kong tension. 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.
There have been no major changes to Chinese economic forecasts with estimates of 5% to 7% GDP growth overing most of the 2021 projections, although very recent sentiment indicators were softer than expected. Recent statements regarding Hong Kong and Taiwan,” frostier” US relations and corporate regulations highlighted the delicate balance between Government and markets.
While there have been no major changes in Japan’s economic trajectory, Yoshihide Suga has suffered a setback in his first electoral test as Japanese PM after opposition parties won a string of victories in by-elections across the country. A “watered-down “Olympics is finally underway although domestic opposition remains high, and new local virus lockdowns are being re-imposed. The monthly “tankan” indicator of corporate activity indicated stronger growth than expected while the monthly inflation figure ticked into positive territory after months of declines. 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. The recent Toshiba AGM highlighted the mood towards better levels of corporate governance.
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 (16.1% estimated by ONS for Q4 2020) has to be balanced against rising bankruptcies, unemployment(4.8% latest unemployment rate), greater poverty, loan repayments and the spectre of higher taxes, and certain residual Brexit negatives (e.g. trade admin, tourist travel, financial services, EU defence, pharmaceutical co-operation, airline shareholder voting structure, Scottish/Irish future…).
Although currently further from investor worries, growing concerns regarding global trade tensions (many), government debt (over 100% Debt/GDP), USA/China/Iran/Afghanistan/9Taiwan/Belarus/North Korea/Russia/Australia/Hong Kong/Ukraine, Middle East relations, BREXIT follow up and possible taper tantrums. It will be increasingly important to watch inflation trends, as any “shock” necessitating greater than forecast bond yields could have serious repercussions for many asset classes.
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.
Global Equities showed a small positive performance over July 2021, the FTSE ALL World Index registering gains of 1.05% in local currency and 0.4% in sterling adjusted terms. America and Europe-excl UK showed small gains while Asia and Emerging Markets showed weakness, in no small part due to a decline of 14% in the Chinese index. The FTSE and FT All-Share both showed negligible monthly movement, the former now showing a seven-month gain of 8.9%. Europe and America continue to lead the year to date gains in sterling adjusted terms while Japan and Emerging markets lag the average. The VIX index, ended the month at 18.49, a monthly jump of nearly 16%.
There were mixed UK sector performances during June with a near 10% difference between the best and worst performing index sub-indices. Mining,especially industrial metals, non-life insurance and property shares showed the largest gains, while tobacco,telecoms,food producers and pharma underperformed. Since the beginning of the year, UK smaller company funds have significantly outperformed equity “income” funds which have, in turn, outperformed the “average UK fund.”. A similar size trend is evident with European funds. Mixed asset funds have shown growth of between 2.4% and 7%, depending on the equity weight, since the beginning of the year (Source Trustnet 30th July 2021). The FTSE private client indices show similar year to date returns of 3% and 7% for cautious and growth funds respectively over the seven month period.
Gilt prices rose during the month, the UK 10-year yield for instance finishing the month at 0.57%. Other ten-year government bond prices showed marginal price gains with closing ten-year yields of 1.23%, -0.46% and 0.01% in USA, Germany, and Japan respectively. Year to date, the UK Government All-Stock Index has fallen 4.26% Corporate bonds also rose over July in price terms as did more speculative grades. All the followed core preference shares have outperformed core government stocks in capital and income terms over the year to date and are still recommended if seeking fixed interest exposure with annual yields in the 5.3%-6% area or 10.5% for the more speculative idea.
A quiet month for currencies with most major moves within the +- 1% area. Over the seven-month period Yen weakness has been a feature. The Chinese has been remarkably stable against the US dollar considering the amount of macroeconomic and geo-political news (managed!)