The first half of the year has ended on a largely positive note as the UK continues its tentative steps towards a return to normality. Momentum has slowed from the initial surge as the emergence of vaccinations last November offered a way past the pandemic, but that was to be expected.
With growth returning to the economy, concerns about rising inflation took centre-stage initially upsetting Bond markets. They too have settled, the consensus for now being that the rise in inflation will be temporary rather than marking a return to the bad old days of double-digit inflation. It is easy to see what is stoking inflation as demand rises as lockdown restrictions ease, met by labour and supply constraints.
Part of the labour constraint in the UK does of course bring Brexit back into the equation and the lack of seasonal workers returning to the UK. The Brexit deal hammered out at the 11th hour has allowed the UK equity market to outperform its major global peers so far this year. This has been particularly apparent in the smaller company arena.
The issue surrounding the Irish border continues to cause concern exposing the deep disagreements that remain and the impact of Brexit on trade may return to the headlines in the remainder of the year now that a certain football tournament has concluded! However, equity markets remain largely unruffled by the prospect – a reminder that, despite the ‘noise’ generated by the media, most quoted companies have adapted to the change in circumstances.
It will take time for the global supply chain to recover its pre-pandemic operating efficiency. A global shortage of microchips is hitting a number of industries. It is little wonder that inflationary expectations have risen in such circumstances and as the cost of commodities, particularly industrial metals such as copper have soared. But markets are betting on the bottlenecks in supplies easing soon and enough to stop inflation becoming ‘baked in’.
Overseas, Asian markets have pulled back after the relative outperformance in 2020 as the Far East was perceived to have coped better than the Western world with the impact of the pandemic. Economies recovered more quickly but the unevenness of the global response to vaccination is now having a more negative impact. The rise of tech giants, in China in particular, has cooled a little in share price terms as increased regulation and government interference weighs on investors’ minds.
So, plenty to ponder as we enter the second half of the year, but beneath it all, Central Banks and Governments worldwide remain in extraordinarily accommodative mode. Interest rates remain anchored near zero and money continues to be pumped into sovereign debt markets and directly into people’s pockets. All this suggests that for now, any sell offs will still be met with a wall of money.