What’s happened in markets?

FTSE All Share 0.55 3.55 2.30 17.60 21.33 6.46 6.51
Euro Stoxx 50 0.17 7.91 3.82 26.04 30.70 14.35 11.04
S&P 500 -0.27 7.75 5.33 26.20 34.30 21.89 18.85
Japan Topix -0.04 2.92 5.35 15.32 20.73 9.41 10.63
MSCI Asia Pac. 1.90 3.25 -0.23 -0.71 8.03 14.14 12.23
MSCI Emerg. Mkts. 1.71 2.61 0.13 1.53 11.30 12.85 11.52
Jo’burg All Shares 3.09 6.16 3.08 22.41 27.78 14.13 10.46
UK Gov’t Bonds -0.89 4.00 -1.60 -4.61 -2.19 3.79 2.85
US Gov’t Bonds -0.71 0.12 -0.66 -2.61 -2.44 5.02 2.75
Global Corp. Bonds -0.68 0.60 -0.44 -0.73 0.98 6.80 4.79
Emerg. Mkt. Local 0.16 0.15 -2.44 -6.93 -2.99 4.16 3.72

Figures in the respective local currencies as at the end of trading on 12/11/2021.

The key highlight in the week of 8 November was the US consumer price index release for October, which was up +6.2% year-on-year, the highest inflation increase in more than three decades. On a month-on-month basis prices were up +0.9%, again beating expectations, and showing no sign that inflationary pressure is easing. A big driver of the price hikes was energy inflation, but even stripping out the more volatile factors of food and energy, annual core inflation was up to 4.6%, its highest since August 1991. Rental inflation also saw its largest monthly increase since June 2006, which is an important measure to monitor, moving forward, as it reflects underlying trend inflation.

The news could increase pressure on the Federal Reserve (Fed) to raise interest rates sooner, but markets are not expecting them to do so until after the bond purchase programme ends in June 2022. Two interest rate hikes are expected in 2022, with another three or four in 2023.

In other central bank news, it was confirmed Fed Governor Lael Brainard was interviewed for the Fed chair position. Fed Chair Jerome Powell’s current term in the post is due to expire in February 2022, and it had been thought Powell would win another four years. Treasury yields fell following this report, as Brainard is generally seen to be more dovish on monetary policy (i.e. more likely to maintain the current ‘accommodative’ monetary policy) than Powell. As such, investors are debating whether she would hold off raising interest rates for longer than currently anticipated and if she would follow through with the planned timeline for the tapering of the Fed’s asset purchasing programme. The central bank continues to buy US$120 billion a month worth of bonds and mortgage-backed securities to shore up the US economy.

The UK’s Q3 gross domestic product data was released on Thursday 11 November, which showed growth was slower than expected over the quarter. The UK has been battling with shortages for many goods, which has pushed up prices and hurt consumer spending. Business confidence is also low according to the published data, with investment in the third quarter well below the levels seen before the pandemic. The Bank of England may feel vindicated, to some extent, in its surprise decision to hold interest rates at 0.1% in its meeting on Thursday 4 November. However, the central bank still faces tricky choices ahead. Although raising interest rates in December should cool rising prices, it could slow economic growth further.

In corporate news, Disney reported worse than expected earnings as it saw a slowdown in the growth of its Disney+ streaming service. It added only two million new subscribers in the third quarter, its smallest quarterly gain since the service was launched in November 2019. It wasn’t a pretty picture in other areas of the business either, with higher marketing costs leading to its film studio making a loss, and its theme parks still not operating at full capacity. On a more positive note, the company has announced plans to build its own ‘metaverse’, which is type of a virtual reality experience that companies (such as Facebook) are already investing in.

Looking across the markets, riskier assets, in particular, have continued to be strong on the back of the Q3 earnings season. However, they have fallen back from their record highs as the prospect of more inflation in the future has dampened sentiment. The defensive qualities of developed markets (+6.2%), growth (+7.3%) and large capitalisation (cap) stocks (+5.8%) led to them being the better performers, while mega-cap technology stocks made information technology (+9.7%) stand out, once again, as the outperforming sector. Energy (-0.9%) has been slightly down, triggered by a fall in natural gas prices, but oil (+0.7%) saw a further rise following reports that the US will not need to release strategic reserves due to the demand outlook. Gold’s safe haven status led it to reach its highest level (+4.1%) since June 2021.

The prospects of a more inflationary future saw longer yields falling as higher quality, longer-dated government bonds yielded positive returns. This ‘flattening’ was most pronounced in the UK, following the weaker than expected growth reported in Q3 2021, which also led sterling to fall against the US dollar.

Latest Consensus Forecast
UK GDP (QoQ) 1.3
UK PMI 57.8
UK CPI (YoY) 3.1 3.9
EU GDP (QoQ) 2.2 2.2
EU PMI 54.2
EU CPI (YoY) 4.1 4.1
US GDP (QoQ) 2.0 2.2
US PMI 66.7
US CPI (YoY) 6.2

What’s happened in portfolios?

Across portfolios, our focus remains on equities, real assets and alternative strategies as a means of building in strong earnings, inflation protection and diversification prospects for portfolios.

We still see a favourable environment for equities, despite the signs of growth moderating, due to the pockets of value we have found. Our preference for domestic developed markets remains constant – specifically pan-Europe – where economies are reopening and valuations are not as stretched on a relative basis. We also have a slight tilt towards value and cyclicals to provide exposure to the continuing economic recovery. And we are inclined to favour smaller, more domestically-focused companies to benefit from the pick-up in economic activity.

Our exposure to the US, despite being underweight in that market, has done well, especially our small and mid-capitalisation position via an S&P MidCap 400 tracker.

On the other hand, fixed income assets continue to face a number of headwinds. Inflation is still a clear threat to mid to longer duration positions, but our preference for taking credit rather than duration risk, with our short-dated, high yield positions in AXA and Muzinich, has paid off on a relative basis.

Within real assets, we are seeing continuing capital raises in the renewable energy sector which have dampened prices in the short-term, but also highlight the attractiveness of the sector. It is a similar story in property, where our positions in UK healthcare homes include Target Healthcare, which recently raised equity and has now recovered in value to trade higher after the capital raise.

Our alternative strategies include music royalties, asset-backed lending and private equity, which was included relatively recently. In terms of asset-backed lending, after a challenging period with the KKV Secured Loan Fund, we now feel confident in the director Brett Miller, who is managing the wind-down. Under his supervision, 67% of the June 2020 net asset value has been returned.

What’s happening this week?

16 Nov • US Retail Sales | 17 Nov • UK Consumer Price Index | 17 Nov • EU Consumer Price Index