What’s happened in markets?

FTSE All Share -0.80 -2.00 -0.11 12.42 22.96 3.53 5.63
Euro Stoxx 50 -0.95 -1.54 -0.41 18.70 27.48 10.46 10.48
S&P 500 -0.54 -0.20 5.36 19.24 34.01 17.42 17.86
Japan Topix 0.41 9.66 7.12 17.72 30.97 9.21 12.38
MSCI Asia Pac. -2.65 2.24 -6.06 -1.29 15.45 11.24 11.24
MSCI Emerg. Mkts. -2.19 2.10 -5.25 0.78 18.23 10.79 10.46
Jo’burg All Shares -1.98 -7.40 -3.95 9.22 18.37 7.42 7.44
UK Gov’t Bonds -1.15 -2.45 1.25 -4.99 -4.79 3.73 1.84
US Gov’t Bonds -0.04 -0.16 1.29 -1.59 -2.45 5.15 2.54
Global Corp. Bonds -0.03 -0.06 1.30 0.06 2.30 6.85 4.69
Emerg. Mkt. Local -1.09 0.20 -1.39 -4.58 1.57 5.43 3.15

Figures in the respective local currencies as at the end of trading on 17/9/2021.

The week of 13 September saw the ramifications of COVID-19 continue to impact global markets, which mostly fell due to continued uncertainty about inflation and legislation in China, as well as concerns over the strength of economic growth.

In the US, inflation fell in August with the consumer price index (CPI) coming in lower than expected at 4.3% and marking the smallest gain since February 2021, but it remains elevated. This is still being attributed to the impact of COVID-19 and remains under the label of ‘transitory’ by the Federal Reserve (Fed). However, US retail sales surprised to the upside, while UK and Chinese retail sales disappointed.

On Monday 13 September, Democrats on the House Ways and Means Committee proposed changes that would see the top corporate tax rate rise to 26.5%, up from the current 21%. However, it is interesting to note that this is lower than the 28% suggested by President Joe Biden in his initial plan, reflecting the fact the Democrats don’t have much of a majority in Congress.

In the UK, inflation jumped sharply over August as the CPI rose from 2.0% to 3.2% year on year, the highest level since 2012. However, this figure is distorted by comparisons to August 2020, when Chancellor of the Exchequer Rishi Sunak’s Eat Out to Help Out scheme depressed restaurant prices in an attempt to boost the hospitality sector as pandemic lockdowns eased. The Bank of England expects inflation to jump to 4% by the end of 2021, but this milestone could be reached more quickly at the current rate.

UK retail sales were disappointing and were impacted by more people eating out as restrictions eased and, therefore, buying less food in store.

The other major news story in the UK was soaring gas prices, with the wholesale price of natural gas surging 250% since the start of the year and 70% since August alone. This has caused knock-on effects across a number of industries, most notably the fertiliser industry, where numerous factories have been closed in an attempt to protect margins. As a by-product of the fertilisation industry is carbon dioxide which is used by the food and drinks industries, this has, in turn, impacted food storage and drinks production. The resulting supply disruption and probable price increases will ultimately affect inflation, especially in the UK, which is reliant on gas imports.

On the COVID-19 front, the UK government announced plans to offer booster vaccines to those most at risk, all over 50s and healthcare workers from the week of 20 September, as part of its ‘toolbox’ of measures for controlling coronavirus over the autumn and winter.

In other news, Chinese retail sales disappointed, as the government reintroduced fresh lockdown measures in some regions after a new cluster of COVID-19 cases were recorded in the southern part of China. Although contained, the shutdown is likely to impact economic data going forward.

In terms of equity markets, performance has been generally down following a strong August. Developed market equities (0.0%) remained pretty flat, while emerging market equities were down (-2.4%) continuing the recent weeks’ underperformance. With regard to style, growth stocks (-0.4%) were down while value stocks (-0.1%) gained a little, but there was little to differentiate small capitalisation stocks (0.0%) and large capitalisation stocks (-0.3%), which were both down over the last 30 days. By sector, only energy (+3.3%) showed a positive performance, reflecting higher oil prices as a result of supply issues following the shutdown of certain refineries in the Gulf of Mexico due to Hurricane Ida in late August. Information technology (0.4%) fell and materials (-1.5%) remained the poorest performer, while utilities (-1.4%), communication services (-0.9%), consumer discretionary (-0.9%), real estate (-0.7%) and consumer staples (-0.7%) also slipped into negative territory.

The stand out performer once again was Japanese equites as most markets moved sideways over the week of 13 September. Following the resignation of Japan’s prime minister, Yoshihide Suga, and some improvement in its coronavirus vaccination rollout, there has been a rally in the Japanese market as international investors expect a period of more political stability.

In fixed income, bonds came under pressure at the end of August on expectations that the Fed might talk more about the extent and speed of tapering in its next Federal Open Market Committee meeting on Wednesday 22 September. Any news is expected to follow the line from the Fed chairman, Jerome Powell, at Jackson Hole at the end of August, in that the central bank will potentially start to taper its US$120 billion-a-month bond purchases towards the end of 2021, and bond markets are positioning themselves accordingly. So we did see a slight sell off in bond yields.

Broad commodities indices reached fresh all-time highs during the week, with gas leading the way. Oil prices have been high and supportive but, as we have discussed, it has been the jump in gas prices as a result of lower supply and lower storage levels that made the news. There have been quite a few different supply and demand dynamics pushing up the price of gas: the hot summer in the US has used up a lot of gas stores; and the significant amount of demand from Asia and also Europe, where supplies from Russia have been limited. Gas has also been the transitionary fuel of choice for cleaner energy, which has also increased demand.

Latest Consensus Forecast
UK GDP (QoQ) 4.80
UK PMI 54.80 54.60
UK CPI (YoY) 3.20
EU GDP (QoQ) 2.20
EU PMI 59.00 58.50
EU CPI (YoY) 3.00
US GDP (QoQ) 6.60 6.70
US PMI 61.70
US CPI (YoY) 5.30

What’s happened in portfolios?

Given the current risk off environment, Morgan Stanley Global Brands has been our best equity performer again this month, helped by strong stock selections in healthcare which have defensive characteristics. Healthcare is also overweight in a number of our other equity managers.

During the week of 13 September, we met with the team at TT Emerging Markets Equity Fund for an update on events in China. Although this was prior to the deepening debt problems of the Chinese property giant Evergrande, which are likely to unfold over the week of 20 September. The TT Emerging Market view is to position portfolios away from areas where the Chinese government is deciding to legislate and make uneconomic, such as online tutoring, which has now become virtually impossible to run as a business. Instead they are focusing on areas where it is in the best interest of China to see more growth, such as electric vehicles and renewables.

In fixed income, our short duration high yield managers AXA and Muzinich have continued to outperform.

On property, we mentioned that BMO Commercial Property Trust completed the successful sale of its St James property trophy asset at a significant uplift to carrying value. The manager’s encouraging view is that demand for premium offices is still there, especially for premium, well-situated assets, with traffic footfall at a high level and almost back to pre-pandemic August 2019 levels.

In other areas, the spike in electricity prices mentioned earlier has had a really positive impact on our renewable energy holdings, which have all been trading higher as a result of the electricity and gas shortages. We have taken advantage of the strength of renewables to continue trimming our exposure to Greencoat Renewables, which has benefitted from high fixed electricity prices.

What’s happening this week?

23 Sep • US Initial Jobless Claims | 23 Sep • UK BoE Interest Rate Decision | 23 Sep • EU Preliminary Markit PMIs