• ChetwoodWM

Client Update - 9th July 2021

Something strange has happened. Federer is out of Wimbledon earlier than usual, losing his final set 6-0 for the first time ever. England are through to the Euro finals, although as usual it was not easy watching (especially for European politician’s post Brexit). Economic data seems to be back to levels seen pre-pandemic. Masks are coming off in public and bubbles in school will be no more. Portfolio valuations have shaken off March 2020 as a bad memory, now long behind us. I gather you will even be able to go up to a bar soon to order a drink. We are being told to live with many 1,000’s of daily COVID cases. Are we on the verge of a new normal?

On an economic basis, it is interesting to observe that economic output in the US, China, and across industrial Asia has fully recovered from the pandemic dip. Corporate profits have rebounded sharply, and earnings expectations for 2022 are ahead of pre-Covid-19 forecasts. Meanwhile, with inflation pressures building, the policy debate has also moved on to the timetable for tapering quantitative easing as a pre-cursor to interest rate rises. The business cycle is moving quickly, and the evidence suggests that we are now entering a mid-cycle, expansion phase. Within that trend, there are some important regional divergences. China finds itself in the most advanced cyclical position and therefore things are expected to cool there, and we have accordingly been reducing our exposure to this area.

The US is also outperforming, driven-on by the fiscal impulse of the March rescue plan. But the size of policy stimulus and the speed at which America is closing the output gap mean the economy is facing supply constraints which impose short-term speed-limits and inflation pressures. So far this is mostly sector-specific, impacting manufacturing and retail where demand is strong. By the time we get to the fourth quarter, the factors that have driven the US inflation scare should have abated. At the end of June, President Biden agreed an infrastructure package worth around $1tn, allocating billions of dollars to upgrade the core infrastructure of the US economy over the next eight years. The agreement, with a bipartisan group of senators, is lower than what Biden proposed earlier in the year but still indicates cohesion between the two parties.

Biden has frequently highlighted the underfunding in US transportation networks, and he believes this new package will put the US in a better place to compete with China's ever-growing presence in the global market. Spending of the size outlined above will create plenty of jobs for the US economy, but only targets 'traditional' infrastructure projects, omitting much of Biden's original $4tn vision of spending on renewable energy and other projects to put the US on a path to net-zero. Once the bipartisan deal is complete, Biden has said he will turn his focus to climate change, education, paid leave and childcare benefits – some of the priorities listed in his Presidential campaign.

Focusing on the now, however, the agreement is another indication of governments around the world picking up the spending baton from consumers. Government spending on infrastructure projects will likely be a driver for economic growth and encourage capex from businesses trying to meet the demand from governments.

So, exciting and interesting times ahead. I have some time off next week, so I shall write again on the 23rd June. Please take care and have a lovely weekend. Good luck to England.

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