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Client Update - 10th September 2021

As is often the way after a summer lull, there is now a lot of news and data for markets to be considering. There certainly seem to be interesting changes in China’s long-term outlook and as global markets digest the impact of this, volatility has returned once again. Alibaba and Tencent are among huge internet companies who have seen billions wiped off their valuations as the Chinese Communist Party (CCP) concentrates more on its financial and social policies domestically than worrying about overseas investors.

A few weeks ago, when a Chinese state media outlet branded online video games as being “spiritual opium”, you know that they are not top of their list of favourites. Similarly, when President Xi Jinping champions the need for “common prosperity” one wonders how long the luxury goods sector can remain immune from its association with overt displays of wealth by those who can afford them.

Global shortages continue aplenty and continue to keep inflation elevated. If you have tried to buy a new car recently you will know that there is a shortage. If you have tried to hire an HGV driver in the last few weeks you will know there is a shortage. Buy building supplies? There is a shortage. Order chicken at Nando’s? There is a shortage. Heaven help us all, but the poor kids cannot even buy a milkshake at McDonalds because…… there is a shortage!

Sadly, the other area in which there are no shortages are geopolitical and economic risks, which is not often good news for the short-term direction of markets. Under the microscope are the changes in Afghanistan. Leaving to one side the political aspects of the sudden withdrawal of troops and the humanitarian consequences that this has triggered, we must wonder what signals are being sent to, and being received by, Beijing and Moscow. Stories are already circulating that China is offering assistance with infrastructure projects in Afghanistan. We have no idea if this is true, but added to Russia’s rocky relationship with Ukraine you could wonder what do China and Russia make of the apparent lack of unity shown by the US, UK and European Governments over Afghanistan? Does it make more or less likely that the West’s resolve is going to be tested with regard to China’s interest in Taiwan and Russia in the Ukraine?

The continued effects of the Delta variant in many parts of the world that are not as fully vaccinated as the UK lead us to expect a continuation of the lower growth environment we had pre-pandemic. In hindsight, the US Federal Reserve (Fed) Chairman Jay Powell is probably very happy to have been so elusive at Jackson Hole on the timeline for “tapering” after the disappointing US job numbers for August. It is not the first time this year that payroll data surprises to the downside without altering the positive underlying trend. Statistical accidents happen. It is however going to be tempting to read the job data in combination with other recent prints – such as the decline in consumer confidence – to make the case for a confirmed slowdown in the US economy.

While this data configuration makes it likely the Fed will remain non-committal on “tapering” at the September meeting, the key question is whether there is enough to derail the expected trajectory of a reduction in market support by the key central bank(s) at the end of this year. A long-term positive outlook with some short-term problems is probably enough to warrant maintaining accommodative monetary conditions for some time to come (i.e. low interest rates), but not enough to justify the continuation of unconventional policies. So, overall, this should be supportive for markets.

The easy part of the recovery from the Covid-19 shutdown in 2020 is behind us. In developed economies, most of the working age population has been vaccinated, most social restrictions have been lifted and we are closer to normality in terms of working practices than we were in September of last year. However, the Delta – and possibly other – variant(s) remain a cause for concern as the disease is spreading rapidly through unvaccinated communities and the efficacy of the 2021 vintage of vaccines is being questioned. This is contributing to ongoing disruption in global supply chains and labour markets. We do not think the recovery and growth outlook is negated by this but there could be some “air-pockets” in the data and in investor sentiment as a result. It is important for us to consider inflation and the prospect of tapering in managing portfolios.

It is certainly not all bad news. Companies are enjoying a bumper earnings year so far. In the Q2 S&P500 earnings reports it was clear that margins expanded again. Whatever costs are being incurred are being passed on (hence the current high inflation figures). The corporate sector can cope with these supply disruptions. The Institute for Supply Management (ISM) reported anecdotal information that demand remained very strong. Production schedules are being re-shaped to reflect better supply-chain risk management, which is a response to various factors impacting global supply (Covid, Brexit, general shift towards more protectionism). The best companies will deal with this, use it as an opportunity to accelerate “sustainable transitions” – car companies could use production shutdowns to refit for electronic vehicle production, for example.

We are into the bumpy part of the recovery. In some places the bumps are large. The UK is suffering from shortages that are both related to Covid and Brexit. Yet we should not get too exercised about this. Jobs and incomes are growing, and demand is holding up well. There are marginal shortages of goods, marginal shortages of labour, but the bellwether of the UK economy is the housing market and that is booming.

There is plenty of good news still around, so please do enjoy a good weekend.

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