With the Summer season (generally a quieter time for markets) over, activity levels in the stock market have predictably picked up. Investor concerns have also risen however with a number of issues coming to the fore. China threw a curve ball in the form of the recent Evergrande incident. Evergrande, China’s largest property company and also the world’s most indebted company, ran into cashflow problems and reneged on a number of loan repayments. Because of its size, and its interconnectedness to a number of financial institutions in the West, this event caused a wobble in financial markets around the world. While the situation appears to have settled down for now at least, we cannot rule out further volatility from this source over the coming months.
Elsewhere, Biden continues to struggle to get his spending plan through Congress while markets continue to be on high alert for Central Bank signals as to when QE might be eased and interest rates may rise. The Covid optimism which was very evident some months ago has been tempered somewhat by the rapid spread of the Delta variant and its potential drag effect on economic recovery is still an issue for markets. And there is of course the inflation issue. Not only has the debate not gone away but more and more commentators are warning about the possibility of stagflation (low or no growth combined with rising prices). A winter of volatility in financial markets could well be in prospect.
The steady rise in equity marketssince the start of the yearcame to halt in September as a result of the various issues mentioned above. Most markets – the main exception was Japan – were in negative territory for the month. China continues to suffer, not just on account of Evergrande, but from the sustainability of its debt levels generally and from the ongoing Government interference in a number of its larger companies. With the range of issues overhanging equity markets generally it really does seem that volatility could be the order of the day over the coming months. Balanced against that we have the Covid dividend for economies and the weight of money argument – money has nowhere else to go at the moment. For the longer term, we remain firm supporters of equities although we do believe that it is important to be selective.
All the talk about the ending of QE, inflation taking hold and interest rates rising has inevitably caused bond yields to rise (prices to fall) in recent weeks. We see this trend continuing although central banks are alive to the risks of yields rising too quickly and will be doing their best to manage the transition smoothly, particularly as regards the winding down of QE. So, while we are wary of mainstream bond markets, there are still pockets of value where very attractive income returns can be achieved. One of these is covered below in our Fund in Focus section.
While we may see rates start to rise in the US and elsewhere next year, for those of us in the Eurozone, we can look to a negative interest rate scenario for a couple of more years at least based on current expectations.
Following an update from IPUT (Ireland’s largest commercial property landlord) in recent days, we took considerable comfort from their message that the death of Irish offices is not yet on the cards. They constantly monitor and seek feedback from their larger tenants and made the following points:
For the above reasons, combined with the fact that there is still some post Covid value in the sector internationally and very attractive income opportunities, we are still recommending having an exposure to a quality, liquid property portfolio.
As we said above, the coming months may well be choppy in financial markets as we reach the final stages of this current bull cycle. We are not recommending that clients adjust their portfolios to cater for what may turn out to be quite a short-term phenomenon. New money going into markets would be well advised however a phased approach to equity investments should be considered. Investors should also consider alternative assets such as infrastructure, renewables as well as property. Longer term we are happy that value can still be found in equities and in some niche areas of the bond markets.
Our fund for this month is Jupiter Contingent Capital Fund – Click here to see more details
As always, you should only consider the investment views contained in this Monthly Market Insight update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model.
Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email email@example.com.
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