The week in review

What’s happened in markets?

Figures in the respective local currencies as at the end of trading on 8/10/2021.

The week of 4 October was deemed to be interesting from an economic standpoint: while we are still in an expansionary phase, growth is appearing to plateau.

In the US, September’s purchasing managers’ index readings were revised upwards, but pointed to supply chain issues across multiple countries – issues which are likely to hamper growth. Meanwhile, US jobs growth disappointed, with only 194,000 new jobs added in September, which was the lowest number since the start of the year and significantly below the 500,000 expected. However, the unemployment rate fell to 4.8%, its lowest level since the start of the pandemic, and wage growth picked up on a year-on-year basis.

This prompted concerns over stagflation – a scenario where inflation is high, the economic growth rate is slowing and unemployment remains too high. It’s also a scenario that many investors are unfamiliar with and that, along with the uncertain political environment, is causing concern. Here, although the US senate approved legislation to extend its debt ceiling for two months to December, the process created unnecessary volatility across financial markets – price movements that will be seen again as we near the new deadline. All eyes now will be on the Federal Reserve and its November meeting, which many believe will announce the start of tapering for bond purchases, despite the disappointing job numbers given the persistence of inflation.

In the Eurozone, minutes of the European Central Bank’s September meeting, published on Thursday 7 October, revealed tension among policymakers over its inflation forecasts. They warned about the risk of a ‘regime shift’ in prices and called for a bigger cut in asset purchases than had previously been agreed at its August meeting.

In the UK, economic recovery continued to be hampered by ongoing supply chain issues, a jump in inflation and the risk of rising unemployment, as the government’s job-protecting furlough scheme ended on Thursday 30 September. The news is prompting the Bank of England to consider earlier interest rate increases than it would have preferred.

It was against this backdrop that the Reserve Bank of New Zealand raised interest rates for the first time in seven years. Although the nation has a relatively confined economy, this had a knock on effect more widely given people have been expecting a shift from rhetoric to action by central banks following the recent more hawkish tone of meeting minutes with regard to interest rates.

On the corporate front, Facebook suffered one of its worst weeks ever in financial markets, the courts and news headlines. While the whistle blower’s testimony in a senate hearing caused general outrage, the bad news continued when the platform suffered a global outage that lasted several hours. As a result, Facebook shares slumped 15% from the previous month’s level, although the stock has still delivered year-to-date performance of 21%, which compares well against most global equities. At the same time, Comcast Sky launched its first ever smart TV service, which does not need a satellite dish, which sees them taking on streaming services such as Amazon and Netflix.

In markets, we saw a degree of risk appetite returning following a cautious few weeks, in part following the positive news on the US debt ceiling developments. Value stocks (1.4%) did well, largely on the back of the slightly higher bond yields, but growth stocks (0.2%) continued to underperform. Energy (4.3%) was the outperformer, despite a degree of easing on gas prices after Russia hinted it would supply more natural gas to Europe. Oil stocks (4.5%) were also up over the last 30 days, with Brent crude briefly reaching US$83.50 a barrel and US prices reaching a seven year high. The shift up in energy pricing has been a concern for markets, with gas prices, in particular, dominating the headlines.

What’s happened in portfolios?

The key themes in our portfolios have remained in place.

We still see the current environment as reasonably favourable for riskier assets, such as equities, but there are signs of growth moderating. We’ve maintained our preference for domestic developed markets – specifically pan-European – where economies are reopening and valuations are not stretched on a relative basis. We are also starting to look at emerging markets again, where the valuations look less stretched and we believe we can benefit from the global reopening of economies.

In fixed income markets, the converse is true and we see this as a less favourable environment. The week of 4 October has seen this view play out with starting yields at historically low levels so there is very little direction they can go in other than the opposite. Inflation remains a clear threat, particularly for mid to longer duration holdings. As such, we maintain our positioning within portfolios, with our preference for credit risk rather than interest rate risk. As a result, our short duration bias has helped as yields rose and our holdings in Axa and Muzinich continued to do well on a relative basis. Our longer duration investment grade holdings performed less well.

In other areas, real assets are attractive as an alternative to fixed income, offering a degree of diversification with some inflation protection. Infrastructure is of particular interest given the sector’s valuations and the potential for recovery.

In the current environment, we add further diversification to our portfolios with our alternative strategies and have recently added a further position in private equity to tap into the reopening of economies.

What’s happening this week?

12 Oct • EU ZEW Economic Sentiment Indicator | 13 Oct • UK Gross Domestic Product | 13 Oct • US Consumer Price Index