Inflation is simply the story that won’t go away. Despite the official line emanating from Central Banks that the evidence of upward price and wage pressures which has recently come to light, particularly in the US, will be a transitory phenomenon, a growing number of market participants are not so sure. The doubters are still in minority and the prevailing view continues to mirror the official line from the Central Banks. However, there is an abundance of factors feeding the opposite view. Among them are the continuing rise in oil prices, the spike in US house prices in recent months, the acute shortage of shipping containers influencing sharp rises in transport costs, the long waits being experienced for new car purchases (due to parts shortages) and so on. Ironically, of course Governments are one of the primary beneficiaries of inflation as it reduces the value of their debt in real terms and with the growth of Government debt across the world in recent years, a small dose of inflation might be quietly welcomed.
For investors, the concern is if or when the weight of doubters reaches critical mass as this is likely to trigger a market correction. While the past month has been positive overall for both bond and equity markets, the Summer months (traditionally never seen as a positive period for markets at the best of times) could be quite bumpy because of the ebb and flow of inflation worries combined with scope for significant disappointments in relation to the relaxing of Covid restrictions.
Longer term we continue to see value in risk assets and in equity markets in particular.
The past month was a generally positive one for stock markets, with the US (ahead by almost 6% in euro terms) once again leading the charge. For the moment at least, the post covid recovery story is winning out over inflation worries or any potential setbacks arising from the spread of new variants. As far as the latter is concerned, there is growing acceptance that while the vaccines may not be completely effective against the new variants, they do seem to result in much milder symptoms and far fewer hospitalisations. As a result, they may delay but unlikely to reverse the reopening of economies. Economic growth is now projected to be strong in most of the major economies in 2021 and 2022 and equity markets should continue to reap benefits from the improving outlook.
Equity Market Performances (in euro terms)
|Market||Performance June 2021*||Performance 1 year*||YTD*|
*Source Financial Times , Financial Express
The expectation that the Federal Reserve in the US would begin to raise interest rates sooner than had previously been signalled led to a spike in 10-year treasury yields. This has now been reversed and yields have fallen back. However, the event does point up the vulnerability of the bond market. The current consensus view on interest rate trends is a very benign one and bond prices are trading at all-time highs reflecting that view. As a result, it is hard to avoid the conclusion that, for longer term sovereign bonds as well as for high yield corporate bonds, there is material downside risk over the next year.
Holding large reserves of cash is becoming an expensive option these days as banks seek to apply negative rates to a wider range of accounts. For those not seeing a need for their cash over the next three years, there are certainly a number of lower risk alternatives which should be seriously examined. If you wish to look into these options in more detail, you should contact your Client Adviser in Harvest for further information in relation to your options.
While investing directly into unlisted companies can bring a significant degree of risk, accessing private equity via large liquid diversified funds can be a very attractive prospect for pension investors. The backdrop for the larger private equity funds is very positive at this point in the cycle. Debt costs are historically low, company growth prospects are improving post Covid while there are considerable investment opportunities in a number of out of favour sectors.
Covid and inflation related uncertainties will undoubtedly lead to bouts of volatility in equity markets over the coming months. On the other hand, the emergence of countries from restrictions provides plenty of opportunity for companies exposed directly or indirectly to consumer markets to enter a period of strong growth. This trend will have a strong underpinning effect on markets, and we would still expect markets generally to finish ahead of where they are now at the end of the year.
Our fund for this month is –– Guardcap Global Equity Fund– Click here to see more details
As always, you should only consider the investment views contained in this Market Insights 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 firstname.lastname@example.org.
This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and/or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: Past performance is not a reliable guide to future performance. Warning:
The return may increase or decrease as a result of currency fluctuations