Investment Update – Autumn 2021
This week marks the anniversary of the Pfizer/BioNTech Covid-19 vaccine announcement, an important milestone. Other leading pharmaceutical firms launched vaccines of their own shortly after, allowing governments throughout the world to offer doses to their populations on a mass scale. One year later, the data suggests the vaccines have been very effective at dampening the risks posed by the virus.
As would be expected (and in anticipation of such an outturn), financial markets reacted very strongly since ‘Vaccine date’, taking ‘confirmation’ that economic conditions would inevitably improve from dismal to buoyant. The rising tide lifted all boats, with global stocks since rising just under 30% (at the time of writing), as measured by the MSCI World index in GBP terms.
Economically sensitive, cheaper stocks (Value) outperformed aggressively for roughly six months as investors rotated from recent winners, such as Work From Home Technology companies and other market darling Growth stocks, into beaten up recovery names. Having fallen further, the recovery stocks had more to gain if they could survive to see economic normality. Mid and Smaller Company stocks rose at an even greater pace than Large Cap stocks, for similar reasons; smaller companies are generally more sensitive to domestic economic conditions than their larger, multinational counterparts. The UK FTSE Small Cap ex-investment trusts index was at one point up almost 70%. Over the one year since the virus announcement, the FTSE 100 index was on the verge of outperforming all other major stock market regions, including Europe, Japan and Emerging Markets, before just being pipped at the post by the US. This positive outcome marks a welcome change from recent years.
As ever though, it was not always plain sailing. Inflation concerns surfaced early in 2021 as supply bottlenecks and other shortages caused short-term headaches to companies and consumers. Product supply chains were hampered notably under the stresses of economic lockdowns, leading to shortages in goods such as computer chips and sharp rises in global shipping rates (which affect) the pricing of imported products that consumers buy). Several older workers also took the opportunity to claim early retirement, while the policy impact of Brexit saw a cessation in the usual influx of foreign immigrant workers, both of which contributed to labour shortages, most publicised in areas such as lorry driving. Oil prices also doubled over the year, feeding into all manner of transport and manufacturing costs.
There is much debate in financial markets as to whether widespread price increases might prove to be a temporary phenomenon – as a result of Covid disruption – that will eventually work itself out, or whether higher inflation might prove more permanent. If the latter, conventional investment portfolios could potentially face a degree of turbulence given high valuations for both stocks and bonds on many counts. That said, our judgment is that the KMD portfolios (as they look today) would be expected to fare relatively well due to the inclusion of many inflation-beneficiary asset or investment sub category types.
Unlike the party mood seen in Developed country stock markets, Emerging Markets have struggled since early 2021, the point at which inflation concerns spooked markets. Generally speaking, if global central banks such as the Federal Reserve and Bank of England are seen as having to turn up interest rates in order to choke off inflation risks, less money tends to find its way to peripheral countries.
Events in China also made the headlines, not helping whet the appetite for Emerging stocks. Evergrande, the world’s most indebted property developer, defaulted on its debt, providing echoes of the global financial crisis. However, it must be pointed out that over 90% of Evergrande’s debt is owed locally within China, so the chances of this being an international debt problem via a chain reaction from bank to bank appears unlikely. Rather, problems are likely to be mopped up internally within the Chinese financial system – the authorities have many levers to pull. That said, property market turmoil generally leads to significant debt problems within the banking system, so there is certainly the potential for these to act as a drag on Chinese growth, regardless of deep pockets, offsetting progress elsewhere and those levers. Should Chinese growth come under pressure, this in turn could dampen the near-term prospects for those doing business with China (Asia Pacific region, Germany and Europe as key exporters, for example).
As a result of this and general signs of US growth paring back modestly, Bond markets appear to have become more concerned about slowing global economic growth prospects since the Summer. Since then, much of the Value vs Growth dynamic has reversed (albeit the rising tide has lifted all boats roughly equally high at the time of writing). Key central banks, including those in Canada, Australia and the UK, have sought to quell fears that they might leave an overheating economy unchecked. Consequently, this has taken the edge of some of the recovery plays since the Summer.
As would be expected in a rising tide environment, defensive assets proved dull over the past year. Gold declined – in mirror image to risk assets – for the first few months after the vaccine announcement was made, while UK Government Bonds came to lose circa 5% of their value. Since then, such instruments have broadly moved sideways, as have Corporate Bonds, over the entire period. Defensive share types also failed to join the party, with Utilities, Infrastructure and Consumer Staples (Food and Beverage) companies, for example, only registering slight gains, despite the rising tide.
All in all, 2021 looks set to close as a bumper year for investment portfolios. As always, though, we remain mindful of the need to consider the relative prospects for the tortoises as well as the hares.
The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.