The global reopening continued through August with further restrictions being lifted, although the Delta variant continues to spread leading to an increase of cases once again across the globe. Here in the UK and Europe, this has not led to a corresponding increase in hospitalisations and deaths, however in the US hospitalisations have increased more sharply, possibly due to the lower take up of the vaccine. Data suggests that once someone has been vaccinated, the effectiveness of the vaccine reduces after six months, although some ongoing protection seems to remain. A booster programme is being established in the UK which is being rolled out over the coming months.
Therefore a big caveat to what will happen to markets still has to be applied as the shadow of Covid remains, but the general consensus and market expectation is that the worst is behind us and this is leading to a consistent and strong return from risk assets such as shares.
In terms of the performance of the share markets, the US continues to be the powerhouse that drives the global markets and whilst the data in August suggested the rate of growth has slowed within the US economy nevertheless it is still producing very healthy growth figures that continue to fuel the concerns around inflation which have been dominating the headlines here and globally. In the US the current rate of CPI remains at a decade high 5.4%, which dwarfs our own figure of 3.2%% year on year for August. Inflation in the US is undoubtedly being driven by an economy in recovery, but many commentators suggest this is a transitory period that will return to more normal and sustainable levels once the impact of comparing a very difficult 2020 with the current year works its way through. Whilst the impact of Covid has been a driver of inflation through pent up demand and supply chain disruption, there is a wall of money chasing goods and assets created by the fact that the US Govt spent $6.55 trillion in 2020 whilst raising $3.42 trillion in revenue and in 2021 the projected deficit is $3.67 trillion, there was a similar pattern globally including here in the UK. Therefore, the question of whether the increase in inflation is transitory or will be longer-lasting is still to be answered.
The UK markets as measured by the main indices have lagged the international markets for a number of reasons, including the constituents of the indices that are being measured. For example the FTSE100 largest constituent sector is financials at approximately 20%, which were badly hit by Covid, whereas the S&P 500 has less than 10% in financials and has over a quarter of its value exposed to IT and almost 15% to healthcare, sectors that did very well during the pandemic
Inflation may be slowed in any event by government action. We have seen here in the UK increases in taxation with the increase in National Insurance rates and freezing of tax allowances and thresholds, I am sure we will see more of this, but in the US the prediction is that tax revenues will rise by approximately $600m in 2022 when compared to 2021, through increased taxation. Using either fiscal ( taxation) or monetary ( interest rates) instruments to reduce the money in the system ( by increasing interest rates or by increasing taxation) will slow down economies which will reduce growth, which eventually will reduce inflation . The political power balance in the US may lead to moderate responses to calls for decisive action in any direction as any extreme views will have to be watered down to get through government approval, in addition, the argument of raising taxes too early when an economy is in a fragile recovery, against leaving matters too late and seeing a return to a boom and bust cycle will rage on. There appears little appetite at this stage for significant change and the US Treasury has indicated no change to interest rates are expected until 2023 at the earliest.
Against this background markets have been resilient with Global equities producing total returns of 2.5% for the month of August, maintaining the very stable and positive trend since they went into recovery shortly after the fall in March 2020. The FTSE ALL Share produced a return of 2.7% with the more domestically focused FTSE 250 returning an impressive 5.3%. . In addition, we still have uncertainty in respect of Brexit to deal with. As we have emerged from lockdown the UK market has closed the gap on the global market performance and whilst this trend has slowed it is still continuing.
Much of this review has focused on the share markets, in the main because these are the assets that are an expression of the health of the general economy and are the asset which forms the majority of investment portfolios and are the drivers of growth. However, they can also be volatile in nature. We are firm believers in diversifying client holdings generating exposure to all major asset classes including fixed interest, property, commodities and infrastructure. Many of these assets perform in a negatively correlated way, so in other words, when one asset goes up, another will fall and vice versa. In addition, some assets are not correlated at all and will not be impacted by the performance of other asset classes. Whilst this does mean that a client is potentially giving up some investment performance from the higher risk assets by diversifying away from these areas, it does mean that clients will experience a smoother journey, which for most clients is just as important as the performance, or final destination.
Building a diversified and well-balanced portfolio that takes accounts of market conditions trends and themes and developing tactical decisions to maximise returns whilst reducing risk and volatility is at the heart of the advice process and has to be driven by our client’s circumstances and objectives, the world is forever changing and with it the opportunities and threats that we face.