As we entered Q4, markets were feeling a little less certain than earlier in the year. The momentum of the vaccine-led pick-up has played out, as anticipated, and is now balanced by the uneven nature of the global recovery.
As economic recovery has gained traction, it has exposed the inevitable blockages in the global supply chain and a shortage of skilled and semi-skilled labour in a number of sectors both here in the UK and overseas.
One inevitable consequence has been the increased cost of commodities such as basic metals and oil, the latter rising above $80 per barrel. This in turn has started to feed through to inflation, which had been dormant for over a decade and on a downwards trajectory since the late 80s.
The key now is how persistent the current inflation proves to be. In truth nobody should claim to know for sure, but we are still minded to agree with the consensus view that inflation is likely to be transitory and ‘work’ its way through the system as global trade normalises over the coming months and years.
Nonetheless, markets are likely to be more volatile than they have been, with inflation figures running well above the Bank of England’s 2% target. Much depends now on how Central Banks react to heightened inflation whilst they continue to adopt crisis mode through quantitative easing.
The near-zero interest-rate policy backed up by asset purchases (mainly government debt) has clearly been a healthy backdrop for investment in risk assets such as corporate bonds and equities. It continues to be so and, yes, it will be tricky to wean the markets off the stimulus.
Fixed income (debt) markets have reflected inflationary concerns throughout the year. Initially we saw a rise in yields (and fall in value) as the markets fretted over inflation followed by a retrenchment over summer. Yields have started rising again although not to March peaks. We monitor closely. Importantly default rates (companies failing) remain very low.
Asian markets, and China in particular, have fallen back this year. Much of this is due to Chinese state intervention in a number of sectors, primarily tech-based to rein in the growth of global mega-companies. Asia remains an attractive long term investment opportunity but a reminder in the short term that geopolitics can be a constraint.
COP 26 will take place in November which will sharpen the focus again upon the environment and the need to accelerate plans towards carbon neutrality. This will come at a financial cost and indeed may prolong the inflationary spike. It will also bring opportunity to those companies who innovate and adapt.
We move towards the year-end expecting asset price volatility to remain a short-term feature of markets and as such marginally more defensive in portfolio positioning. The continued central bank and government stimulus continues to suggest that setbacks, if they come about, will be short-lived.