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Client Update - 25th June 2021

The global economy has recovered exceptionally well after one of the deepest recessions of the post-war era, but how challenging will the next period of this economic cycle be?


The Federal Reserve (FED) meeting last week was the first sign of a hawkish turn, indicating they will likely raise rates in 2023. The FED tends to first reduce asset purchases before increasing interest rates at least several months after that and indicated it would provide advance notice before reducing purchases. This implies that the FED will start reducing asset purchases in 2022 and therefore we could see the FED announcing their intention to taper later this year. That being said, the message on reducing asset purchases has been mixed, with some members advocating for the process to begin sooner rather than later, and others saying it is still quite a way off. The US Dollar strengthened on the news of tighter monetary policy and inflation expectations declined as markets took this as a signal that the FED would act if higher inflation showed signs of becoming permanent. We have today seen the Bank of England talk down the effect of short-term inflation, and this has seen the Pound Sterling depreciate further against the Dollar. Commodity prices have started to retreat from their multi-year highs. Earnings and economic growth have been strong this year relative to last year but in Q3 and Q4 of 2021, the comparisons to the same period of 2020 might make the figures look less rosy. So, are we approaching peak economic and earnings growth? After being unable to spend so freely, and also from various government support schemes, consumers have had more cash in their pockets. The unlocking of the economy unleashed a surge of pent-up demand into an economy operating with reduced capacity, which has created inflation and bottlenecks. We may well be at peak consumer growth but spending from governments and businesses is only just beginning and will hopefully pick up the baton. We therefore remain positive on equity investments.


Government spending


Governments across the world have drawn up vast 'green' infrastructure plans and have committed trillions to transforming their economies away from using carbon. Of the $4tn of extra spending proposed by US President Biden, $2.2tn looks set to go on green and sustainability-related infrastructure investment. In Europe, 30% of the $750bn EU Recovery Fund will to be directed towards green projects. And in the UK, the Government has set out a ten-point plan, which outlines the approach the government will take to support green jobs and accelerate the country's path to net-zero. Investment by Governments is not just seen in Western economies though. In September of last year, President Xi Jinping of China committed to net-zero emissions by 2060. This is an ambitious target, especially as China are responsible for a quarter of the world's greenhouse gas emissions, but the Chinese government are taking it very seriously. China's five-year plan also indicates that further attention and resources are likely to be allocated to green energy and infrastructure spending, with the plan incorporating green targets. This mammoth spending from governments will likely be a driver for economic growth as life finds some normality again.


Capital expenditure


The flood of government spending will coincide with significant capital expenditure (capex) from businesses. This is something we have not seen in recent times, but companies are now starting to invest in huge numbers. This expenditure has been spurred on by large corporates being flush with cash, but also by them trying to meet the massive demand from Governments, particularly related to 'green' infrastructure, with automakers building new battery plants to meet demand for electric vehicles, for example. Likewise, businesses have ramped up their spending following many inventory shortages and bottlenecks. The global semiconductor shortage has led to a flurry of investment announcements in new factories and rising freight rates have prompted a surge in new orders for container vessels. It remains to be seen whether the post-pandemic norm will be one of structurally higher investment spending, or whether firms slip back into their old ways. Either way, we remain vigilant on your behalf.

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