The week in review

What’s happened in markets?

Figures in the respective local currencies as at the end of trading on 3/9/2021.

In the week of 30 August, the running theme throughout events continued to be the Delta variant. This was reflected in US payroll figures on Friday 3 September that surprised on the downside at 235,000, against an expected growth of 700,000. It was also significantly down on the one million payroll growth quoted in July. However, the reaction in markets was quite positive, as slightly bad news could mean delays in the Federal Reserve’s (Fed) tapering policy.

There were dovish remarks from the Fed at the virtual Jackson Hole symposium, where Fed chairman Jerome Powell stressed that, while they would start tapering this year, it was not a signal for imminent interest rate hikes. The market took this well, given the concerns over ‘taper tantrums’ that we previously saw back in 2013. However, the statements led to some downward pressure on the US Dollar.

With signs of economic activity slowing around the world as a result of the supply disruption caused by the pandemic, inflation in the Eurozone came in at 3%, the highest in almost a decade. There were more hawkish comments – i.e. statements that auger higher interest rates – from central bank governors around Europe following the higher than expected inflation readings. However, the chief economist for the European Central Bank, Philip Lane, said he believes that inflation is largely transitory and he’s not concerned, particularly given they’re not seeing inflation come through in terms of higher wages as yet.

The spread of the Delta variant continues to cause issues in other parts of the world as well, with weak purchasing managers’ index data on services coming out from China, Japan and Australia. This is not a surprise as China and Australia have a zero tolerance policy to COVID-19 cases and lockdowns are affecting economic growth. Meanwhile, Japan has lagged on vaccinating its population causing a prevalence of cases which have impacted economic activity there. This, along with local negative feelings on the recent Olympics going ahead, led to low approval ratings and, ultimately, the resignation of the Japanese prime minister, Yoshihide Suga.

In China, the central bank is providing CNY 300 billion of low cost funds to banks so corporates have easy access to loans and financing, in an attempt to support businesses during the ongoing pandemic. However, the government has continued to implement its regulatory crackdown, which is also impacting the economy.

On Wednesday 1 September, OPEC+ decided to stick with its July agreement of increasing production by 400k barrels per day. The group noted its concerns about the impact of the Delta variant, but they did not see any urgent need to make changes.

August was a quiet month in markets, but a good month for equities and other riskier assets in general. Virtually all sectors have delivered positive returns over the last 30 days. Developed market equities performed well, despite the concerns around the Delta variant and any fall out from the news coming out of China. With regard to style, growth stocks (+3%) have marginally outperformed value stocks (+2%). However, there is not much to differentiate between cyclical and defensive stocks given the eclectic mix of different sectors performing well last month, including communication services (+4%), utilities (+4%) and financials (+3%). Emerging markets (+1%) recovered some lost ground towards the end of the month, but still lag developed markets (+3%) by quite a margin. This is largely due to China, which constitutes such a large proportion of emerging market equities, and its recent regulatory impositions.

In fixed income, the general risk on environment saw high yield bonds rally, and become the best performing asset type of the fixed income sector, and a slight rise in the longer-end government bond yield.

In commodities, gold has been supported by the dovish Fed and its low interest rate expectations. Oil prices have risen due to Hurricane Ida, which closed many US refiners ahead of the storm, and a bigger than expected fall in oil inventories. More broadly, a weaker US Dollar tends to be good for commodities.

What’s happened in portfolios?

The resurgence in optimism of late has meant our value, cyclical holdings have been a stand-out performer, instead of growth stocks. These benefitted from the overweight position to Europe and financials, in particular banks which do well on the back of yield curve steepening. This means at the longer end of the curve they can charge a higher interest rate on loans, while at the shorter end they can pay a lower rate on deposits.

In fixed income, we’ve also seen a rotation. Our high yield managers have benefited from their short duration bias as they were less impacted by yields rising. Higher yields means lower price, so when yields rise it dampens the total return.

On property, we took advantage of better price and trading volumes in Impact Healthcare to trim our position. However, we still believe in the underlying fundamentals for care homes, given the ageing population and supply shortages creating very strong tailwinds in this area, and so retain significant investments in this sector.

In other areas, Greencoat UK Wind saw a 2.5% rise in net asset value over the first half of 2021, supported by a recovery in power prices, which offset the lower wind speeds.

What’s happening this week?

9 Sep • ECB Monetary Policy Meeting | 10 Sep • UK GDP | 10 Sep • US PPI Data