Market Conditions – 19th November 2021

After a fortnight that has included a compromised COP26 agreement to phase down coal usage, cuts to HS2 but planned rail improvements for our Northern Powerhouse, pleas for people to get their booster jabs to save Christmas, our Prime Minister declare that “the UK is not a corrupt country” then not lose minutes of a meeting, but be unable to find them at present, Elon Musk run a Twitter poll as to whether he should sell 10% of his Tesla shares and Steven Gerrard join Aston Villa not as a stepping stone to his dream job at a big club, markets have been mixed as investors weighed a rise in US inflation against the EU’s more optimistic economic growth forecasts.

American markets fell slightly, after US headline consumer price index (CPI) increased at its fastest annual pace since 1990. This overshadowed news that weekly jobless claims had reached a new pandemic-era low. In contrast, European markets did well as the EU raised its economic growth forecast for the eurozone and industrial production fell less than expected. The UK’s FTSE 100 gained 0.6% as investors digested the latest gross domestic product (GDP) data. Over in Asia, the Chinese markets rose following reports that Beijing is considering easing rules to let struggling property developers sell off assets to avoid defaults.

European indices continued to rise this week following encouraging economic data from China where industrial output rose 3.5% in October from a year ago, beating expectations of a 3.0% increase. Chinese retail sales rose 4.9% year-on-year, significantly higher than forecasts of 3.5% growth.

The FTSE 100 was little changed after Bank of England governor Andrew Bailey said he was ‘very uneasy’ about rising inflation and had come close to voting for an increase in interest rates when policymakers met earlier this month. He was ‘very sorry’ that households were feeling the impact of rising prices, but that the Bank wanted to see what impact domestic and global issues were having on the cost of living before deciding on whether to raise rates. He told the BBC that current conditions were different because inflation was being driven by global supply shocks rather than demand pressure in the UK economy. The Bank forecasts that inflation is likely to hit 5% next year.

This week, the FTSE 100 has been weaker as it digested the latest employment data from the Office for National Statistics (ONS) where perversely good news is bad news. The number of payrolled employees rose by 160,000 to 29.3m between September and October despite the ending of the furlough scheme. The unemployment rate fell by a bigger-than expected 0.5 percentage points to 4.3%. These figures are likely to fuel further speculation that the Bank of England will increase the base interest rate when it meets in December.

Last week’s economic headlines were dominated by the latest inflation figures from the US, which revealed the headline CPI rose to 6.2% in October from a year ago, the fastest pace for three decades, largely because of faster-than-expected rises in the cost of fuel and food.

Compared with a month ago, prices surged by 0.9%, well above the 0.6% rise forecast by economists. Core inflation, which excludes energy and food, also rose more than expected by 0.6% from the previous month. The data came a week after Federal Reserve chair Jerome Powell admitted that high inflation was lasting longer than anticipated and it was difficult to predict the persistence of supply constraints.

Concerns about rising prices saw US consumer sentiment decline to its lowest level in a decade. The University of Michigan’s consumer sentiment index fell to 66.8 in November, down from 71.7 in October and well below the expected 72.4. Richard Curtin, chief economist of the university’s consumer surveys, said the decline was driven by “an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”

President Biden said at the COP summit that the next Federal Reserve (Fed) Chair would be announced ‘fairly quickly’ but we are yet to find out who will lead the world’s most important central bank. Jerome Powell and Lael Brainard have both been interviewed for the role and both appear to be in the race. Governor Brainard is probably as dovish, if not more dovish, than Powell however does have differing views on bank regulation which has attracted the support of Senator Elizabeth Warren.

It has been traditional for an incoming President to reconfirm the Fed Chair (until Trump removed then chair Yellen), however there appears to be some unease on reconfirming a Republican for the role despite it generally being accepted that Powell did a good job during the height of the COVID-19 crisis. Markets are focused on Fed Policy given the focus on managing inflation and pivotal nature of monetary policy at this time. President Biden will want to avoid too much uncertainty over leadership, making an imminent announcement likely.

Here in the UK, data from the ONS showed the impact that supply chain problems are having on UK economic growth. GDP grew by an estimated 1.3% in the third quarter (July to September), a marked slowdown from the 5.5% growth seen in the second quarter when there was an easing in many coronavirus restrictions. The growth rate was below the 1.5% forecast by the Bank of England, with shortages of goods, labour and components weighing on activity.

The monthly figures showed GDP grew by 0.6% in September but remained 0.6% below the pre-pandemic level. Services output grew by 0.7% as the number of face-to-face appointments at GP surgeries grew, whereas production output declined by 0.4% following two consecutive months of growth.

More encouragingly, the European Commission increased its 2021 GDP growth forecast for the eurozone to 5.0% from 4.8%. The commission’s vice president Valdis Dombrovskis said measures to cushion the blow of the pandemic and ramp up vaccinations had “clearly contributed to this success”. GDP growth is forecast to be 4.3% in 2022 and 2.4% in 2023.

The commission also said inflation would reach 2.4% this year, before slowing to 2.2% next year and 1.4% in 2023. The eurozone’s budget deficit is expected to decline to 7.1% of GDP this year from 7.2% in 2020, and then fall to 3.9% and 2.4% in 2022 and 2023.

Elsewhere, data from Eurostat showed supply chain constraints held back manufacturing in September, with industrial production declining by 0.2% from the previous month. However, this was better than the 0.7% decrease predicted by economists in a Wall Street Journal poll.

Investors were also speculating that the ECB would raise interest rates next year amid a 13-year high in the rate of inflation. However, ECB president Christine Lagarde said a rate increase would be ‘very unlikely’ to take place in 2022. She was quoted by Reuters as saying that despite the current surge in prices, the outlook for inflation over the medium term remains subdued, and therefore the ECB’s three conditions for a rate hike are unlikely to be satisfied next year.

Lagarde also pushed back on expectations of a tightening in monetary policy, saying the ECB would continue to use emergency asset purchases to keep borrowing costs down. “An undue tightening of financing conditions is not desirable at a time when purchasing power is already being squeezed by higher energy and fuel bills, and it would represent an unwarranted headwind for the recovery,” she stated.

This week we bring you:

  • Our latest true or false quiz
  • A Minister for Demographics? – Views from a Corporate Bond Fund Manager

 True or False Quiz

As usual, which of the following statements are true and which are false? Answers and context at the bottom of this update.

  1. There are more trees on earth than stars in the Milky Way or neurons in your brain.
  2. Australia will prevent Chinese companies from importing or investing in 63 technologies.
  3. The EU is looking to support South American economies by securing imports into its single market of beef, cacao, coffee, soy, palm oil, and timber.
  4. The word ‘catchfart’ means a follower of the political wind; one whose actions are guided entirely by the whims and desires of their boss.
  5. And in an entirely unrelated lexicon ‘circumbendibus’ means an answer or argument so convoluted and evasive that it isn’t really an answer at all.
  6. Forget women and children first, you had a better chance of surviving the titanic if you had a 1st class ticket.

 A Minister for Demographics? – Views from a Corporate Bond Fund Manager

What will the world look like in 2100? It sounds an awfully long way away – but then again, our credit portfolios hold bonds that mature after that date. I ask the question in the light of COP26 and the challenges societies face in limiting temperature rises over the long term. The objective of keeping the rise by 2050 to 1.5% above pre-industrial levels looks unlikely given that China is still focusing on a 2060 net zero goal, India is targeting a 2070 net zero deadline and Russia is yet to set a formal goal. However, there have been some wins: greater focus on restoring the world’s forest, more technical and financial support for developing countries, commitments to cut methane, wider recognition of the end for coal-fired power generation and signs that the world’s two economic superpowers are more prepared to co-operate on climate issues.

The transition to a lower carbon economy may be helped by two great trends: innovation and demography. The price of renewable energy is falling dramatically whether it be solar or wind (both on and offshore); the rate of technological improvement suggests this will continue. Coupled with progress on energy storage the outlook looks encouraging. Yes, there will be price shocks when the sun does not shine or the wind does not blow hard enough – but they will get less relevant over time.

The other trend is demography and this is where outcomes are more problematic. The developing world is seeing a massive demographic shift. Where some saw lockdown as likely to rekindle birth rates the opposite has been the case. Shrinking populations in energy hungry societies will be good from a climate perspective and perhaps we are seeing an end to a focus on economic growth as an ultimate goal. But there is another side to the coin. At the present time a fertility rate of 2.1 is required to stabilise the UK population; on current trends this will fall to towards 1.4 by 2023. Later household formations are central here  – reflecting housing and childcare costs, greater female employment opportunities, urbanisation, and more State support in old age. Probably climate fears about what the future holds has given a further impetus.

The UK is not alone – or even at the forefront. Countries like Spain and Italy could see their populations half over a century to 2100. The key problem is how governments will finance themselves: we are on a treadmill where growth supports higher living standards, greater government spending and expectations of ever rising prosperity. As growth stalls due to demographic pressures the costs of carbon transition and healthcare will fall on a shrinking base of taxpayers. I think we need a Minister for Demography that sets out the long-term challenges we face as a society. Let’s face it, Covid could look like a blip compared to the demographic trends we face.

COP26 is about how to come up with solutions for climate warming: the focus is strategic and how big shifts can be attained. For politicians in democracies this does not come easily, with horizons set by election dates. Reading about one UK Cabinet Minister apparently lambasting banks for not offering bigger mortgages made me despondent. I really do think we need a Minister for Demographics to get away from short term thinking.

True of False Quiz Answers

  1. True – based on satellite imagery analysis there are 3.04 trillion trees on earth or 422 for each person alive. It’s estimated that there are 100 billion stars in the Milky Way and the average brain has 100 billion neurons (it does also have a whopping 125 trillion synapses).
  2. True – the off-limits areas are deemed important for national security and include 5G, artificial intelligence, genetic engineering, and quantum computing.
  3. False – As a result of COP26 the EU has put all of these products on a potentially banned list if they are made on deforested or degraded lands. This could spell trouble for countries like Brazil, which exports a lot of beef to the bloc.
  4. True – originated in the 17th Century
  5. True – also originated in the 17th Century
  6. False – Certainly having a higher class ticket helps, but women and children holding a 3rd class ticket still had a better chance of survival that a man holding a 1st class ticket:

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For information purposes only. The views expressed are the author’s own and do not constitute investment advice.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 5th November 2021

After a fortnight that has included a change of name for Facebook, more fishing disruption in the Channel, COP26 and timely climate related travel chaos, the Bank of England holding off an interest rate rise for now, the autumn budget, MPs voting to change their watchdog rules before a quick rethink and England running riot in the T20 World Cup, markets have nudged upwards.

We’re glad we changed our schedule to accommodate considered opinion of all the latest financial planning tactical changes required as a result of the autumn budget announcements…. With no new changes to the major taxes and most other revelations previously announced it was a budget of world beating drabness from an advice perspective. So, moving swiftly on.

Despite some naysayers regarding noticeable absentees from COP26 there have been some significant announcements including stopping international coal-financing, methane reductions and reforestation targets. Arguably one of the most significant developments for private investors is the commitment to GFANZ. GFANZ involves hundreds of the world’s biggest banks and pension funds, with combined assets worth $130tn, committing to the Glasgow Financial Alliance for Net Zero (GFANZ), meaning that by 2050 all assets managed by the institutions will be aligned with net zero emissions.

Given this transfer of wealth and the changing of energy consumption patterns, with increased reliance on greener energy sources, it is predicted that by 2036 around half of the world’s current fossil fuel assets could become worthless.

What is clear, is that from an individual investor point of view, a decision will need to be made on whether or not to incorporate a focus on sustainability into every portfolio and how to best benefit while investing during these transitional times.

 

Back to more immediate headlines. Figures released last week showed that while the UK saw a respite from rising inflation in September, the annual rate remained high and well above the Bank of England’s 2% target. Inflation dipped to 3.1% from 3.2% in August, but this was because restaurant prices rose less than the previous year when the Eat Out to Help Out scheme ended. This offset rising prices in sectors such as transport, household goods and food.

Inflation is expected to rise again because of increasing energy costs and supply chain disruption. The Bank of England’s chief economist Huw Pill told the Financial Times that inflation is likely to hit or surpass 5% by early next year, which would be “a very uncomfortable place for a central bank with an inflation target of 2% to be”. The Bank decided to defer any interest rates rises for now at its policy meeting yesterday, but it will be expecting to make another difficult decision in December.

A survey of consumers by GfK in October found 48% of respondents thought inflation would rise over the next 12 months, up from 34% in the September poll. According to Reuters, this marked the highest percentage since records began in 1985.

UK retail sales fell for the fifth consecutive month in September, despite the easing of Covid-19 restrictions. Figures from the Office for National Statistics showed sales slipped by 0.2%, following an upwardly revised 0.6% drop in August.

Non-food stores saw a 1.4% fall in sales volumes as people bought fewer household goods and furniture. In contrast, fuel sales rose by 2.9% as demand soared towards the end of the month amid warnings over delivery problems. Food store sales also rose by 0.6%.

Despite lockdown restrictions being lifted over the summer, in-store sales remained subdued. The proportion of sales completed online rose to 28.1%, which was far higher than the 19.7% seen in February 2020 before the pandemic hit.

More positively, data from IHS Markit showed growth in UK private sector business activity was the strongest for three months in October, as the easing of restrictions boosted spending.

Conversely, the manufacturing output index fell to an eight month low of 50.6, down from 52.7 in September, thanks to severe shortages of staff and materials. Stronger wage pressures and the worsening global supply chain crisis resulted in the fastest rate of input price inflation since the index began in 1998.

Supply chain bottlenecks also hurt manufacturers in the eurozone, where the manufacturing PMI output index fell to a 16-month low of 53.2. The composite PMI, which combines manufacturing and services, dropped for a third consecutive month, with Germany seeing a particularly sharp slowdown in growth. Nevertheless, the readings remained above the 50.0 mark which separates growth from contraction.

Over in the US, investors were cheered by figures showing existing home sales surged to an eight-month high in September, rising by 7.0% to 6.29 million units. This was above the 6.09 million units forecast by economists in a Reuters poll. The median existing house price rose by 13.3% from a year ago to $352,800, although this was the smallest gain this year because more smaller homes were sold last month, according to the Association of Realtors.

This week we bring you:

  • Our latest true or false quiz
  • The difference between journalists and investors

 

True or False Quiz

As usual, which of the following statements are true and which are false? Answers and context at the bottom of this update.

  1. The price of baguettes has caused a stir about the impact of inflation in France.
  2. US Sales of cigarettes rose last year for the first time in 20 years.
  3. Excluding subsidies it is now cheaper to produce electricity at scale through solar photovoltaic cells and onshore wind farms than by using coal.
  4. The average UK citizens lifestyle produces more than double the CO2 of the average global inhabitant.

 The difference between journalists and investors

There is an old investment adage that says “if you want to be a successful journalist, be a pessimist; if you want to be a successful investor, be an optimist”. For anyone wondering why the balance between happy and sad news is so in favour of the latter, the former doesn’t sell.

If an investment manager were to write a headline on markets right now it could be ‘The global economy continues to grow as innovation accelerates’. Not a bad one, but hardly click bait. If a journalist were to write a headline it would be ‘Risks rise as inflation soars and tapering begins’. For anyone invested in markets, or thinking of doing so, I suspect this would catch the eye more.

Looking back over the last decade this has perhaps been the most unloved bull market of all time. The ratio of negative to positive headlines is at least 2:1, yet since the S&P 500 fell to 676 in the financial crisis of 2009, it has spent the last 12 years increasing more than 650% to current levels. Increasing investors wealth substantially in real terms along the way. That is a headline that certainly hasn’t been written. While there are many reasons for this, many believe innovation has been the primary driver, creating new business models and enhancing old. Of course there have been some bumps along the way, but many continue to believe the next 12 years will be at least as fruitful for innovation to enhance the global economy and improve investment returns. In Royal London’s view, this will occur whatever happens to inflation, China, energy, central bank policy and any other negative headline of the current day. They maintain that if you want to be a successful investor, be an optimist.

Our view – successful investors may need to occasionally be optimists, but when we look at the best outcomes for our clients we also see the benefit patience and the ability to take a long term view can add. Both can be tested by journalists and others on a regular basis, but this is why we continue to focus our planning on the future.

 True of False Quiz Answers

  1. True – the price of a fresh baguette in France has risen by 5 cents, as a global wheat shortage makes the staple of French cuisine (and identity) more expensive. That might not sound like much, but considering that France’s famed “Bread Observatory” estimates that the French eat 10 billion baguettes every year, it adds up. Revolutions have started over less!
  2. True – by 0.4%, after consistently falling typically by more than 4% a year from 2001-2019.
  3. True – the cost of producing a megawatt hour of electricity through solar cells has fallen from $378 in 2010 to $68 in 2019, meanwhile onshore wind energy production costs have fallen to $53, compared to coal costing $109 per megawatt hour. This change in relative cost goes some way to explaining why renewable energy sources accounted for 72% of all new generating capacity worldwide last year.
  4. False – The average UK citizen’s carbon footprint isn’t far off the global average and is less than a third of the average American or Australian. But it still needs to fall by 60% to meet 2050 targets. As the chart below shows:

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For information purposes only. The views expressed are the author’s own and do not constitute investment advice.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 21st October 2021

Following a week that has seen more inflation news and talk of interest rates going up, Covid cases rise, the Earthshot winners announced, Newcastle Utd welcome new Saudi owners and tragedy with the murder of Sir David Amess MP, markets have generally risen.

Now we know we said we write these updates fortnightly going forward but we looked at the diary and realised that this timeline would clash with the budget next week and the inevitable mass circulation of instant contextless headlines. So, what we have decided to do is provide an update today and a more considered post budget reflection in 2 weeks.

This approach, completely by chance, also gives us an opportunity to mention the launch of our new website… please click on the image below to see it – we’d welcome your feedback.

 

Figures released by the Census Bureau last week showed US retail sales jumped by 0.7% in September, far better than the 0.2% decline expected by economists. Compared with a year ago, sales were up by 13.9%. The increase came as the government ended the enhanced benefits it had been providing during the pandemic. It was thought this would depress sales, but instead spending accelerated as workers and students returned to offices and schools.

Much of the increase was driven by higher prices, as US retail sales figures are calculated according to receipts as opposed to volume. Indeed, separate data showed inflation, as measured by the consumer price index (CPI), rose by 5.4% in September from a year ago, slightly higher than the 5.3% increase expected by analysts. On a monthly basis, prices increased by 0.4%, following a 0.3% rise in August. Core CPI, which excludes food and energy, rose by 4.0% from a year ago – well above the Federal Reserve’s 2.0% target.

Meanwhile, the University of Michigan’s consumer sentiment index slipped in early October to 71.4 from a final reading of 72.8 in September, suggesting consumers remain anxious despite spending more.

Here in the UK, figures showed GDP grew by 0.4% in August from the previous month, as the hospitality industry benefitted from the first full month of coronavirus restrictions being lifted in England. Accommodation and food service activities were the main contributor to growth in the services sector, rising by 10.3%. This was followed by arts, entertainment, and recreation, up 8.5%. Despite the increase, the Office for National Statistics (ONS) said GDP remains 0.8% below its pre-pandemic level, while consumer-facing services are 4.7% below their pre-pandemic level.

Investors were also cheered by data that showed UK employers added 207,000 staff to their payrolls last month, shortly before the end of the furlough scheme. This meant the number of payrolled employees surged to 29.2 million – the highest level since records began in 2001. However, the unemployment rate for June to August was an estimated 4.5%, higher than the 4.0% rate seen before the pandemic.

Over in Europe, Germany’s GDP forecast for 2021 was slashed last week by a group of economic research institutes. The group’s biannual report said the German economy would grow by 2.4% this year, down from its previous forecast of 3.7% growth. The researchers said the reduction was driven by the ongoing impact of Covid-19 on the service sector, and continuing supply chain issues. GDP is expected to grow by 4.8% in 2022, assuming the pandemic and supply chain disruptions are resolved.

Supply chain issues are affecting the eurozone more broadly, with industrial production falling in August by 1.6% from the previous month. Eurostat said one of the steepest declines was in Germany, where output dropped by 4.1%.

This week we bring you:

  • Our latest true or false quiz
  • A review of the third quarter of this year from Brewin Dolphin

 

True or False Quiz

As usual, which of the following statements are true and which are false? Answers and context at the bottom of this update.

  1. Banksy’s Love Is In The Bin – the artwork that shredded itself after being sold in 2018 – has gone for £18.5m, a record for the artist at auction.
  2. Wizards can earn NZ$10,000pa from the government in New Zealand.
  3. All Rolls-Royce Trent jet engines (representing 40% of all the world’s long-haul jet engines) are compatible with 100% sustainable aviation fuel.

 

Q3 2021 Review – Brewin Dolphin

Strong growth in profits provided a boost to company shares during the third quarter of 2021 but anxiety over the future tempered those gains. For most companies the worries surrounded the rise of inflation which has remained higher than policymakers expected. There are winners and losers from higher inflation, but it brings with it some concerns. Future profits, for example, might not match those of the past if companies’ costs go up but they can’t pass on those costs to customers.

Prices have been rising for several reasons but most of them stem from the outbreak of the Covid-19 pandemic. The lockdowns which were instigated to control that spread meant the closure of shops which, in turn, was assumed to mean much less demand for goods. In fact, quite the opposite happened. Goods demand moved from the high street to the internet and, confined to their homes, consumers substituted their spending on services for spending on goods.

Some of the supply shortages can therefore be blamed upon companies misjudging en masse about what lockdown would mean in terms of goods demand.

Central banks were also surprised by the strength of demand, having reached for their traditional recession fighting policy tools as lockdowns were imposed. That meant cutting interest rates to boost demand and inflation, both of which were actually in plentiful supply for the economy as a whole.

Aside from misjudging consumer demand, logistics have also played a part. Getting goods from factories has proved to be a deepening challenge. Global long-distance goods transport costs rose as ports became congested (partly through sheer volume) whilst some Chinese ports were temporarily closed to contain Covid-19 outbreaks. Every ship standing idle waiting for a berth to become free for unloading further reduces transport capacity. Passenger flights have been the willing conduits for small, valuable, or perishable goods travelling long distances. With fewer passenger flights due to travel restrictions, that capacity has been lost as well.

Typically, the most volatile form of inflation for consumers and businesses is energy prices, the most volatile component of which is normally oil. ‘Upstream’ oil prices have been rising but towards the end of the quarter oil availability became an even greater problem ‘downstream’ as a shortage of HGV drivers made it difficult to get petrol to filling stations. The world looks forward to a time when fuel price volatility will be a thing of the past due to reduced reliance on fossil fuels. However, that time is not now.

Aside from logistics, the oil market has suffered from the same misjudgement of demand and supply with the expanded Organisation of Petroleum Exporting Countries (OPEC) keen to limit additional energy supply to the market for fear of causing prices to collapse. At the same time, in recent years oil companies have reduced their investment in fossil fuel reserves due to concerns over the long-term demand for this polluting fuel. This has particularly affected OPEC’s big rival, the US shale oil industry, which has been slow to respond to rising prices.

In the short term, rising energy costs meant some of the more polluting forms of energy became less expensive than cleaner alternatives. The most obvious example of this is natural gas, the cost of which rocketed during the summer, prompting a gas-to-oil switch. The confluence of additional factors all contributed to the rise. Russia is rebuilding its stockpiles; Norwegian production was lower than normal due to maintenance work. China ended the summer by instructing state-owned companies to secure supplies of energy commodities at any cost, meaning tough competition for European power producers trying to secure cargoes of liquified natural gas (LNG). Northern Europe’s great strides in building wind power generation have given a disappointingly low yield due to a lack of wind.

In short, from a supply perspective it seems like anything that can go wrong has gone wrong.

Oil price inflation often comes in bursts as higher prices prompt more supply, bringing the market back into balance or even over-supply. The same can be said for many of these other inflation categories as well. At some stage Russian gas reserves will refill; queues at ports will be cleared; air travel will resume; and consumers will prioritise services over goods. This can be compounded when consumers need to prioritise their spending on expensive fuel, thereby reducing demand for other goods.

Supply chain managers are wary of what they call the bullwhip effect whereby the cumulative effect of small changes in consumer demand can be amplified as they work their way down the supply chain, causing a market to swing from under-supply to over-supply very rapidly.

In the aftermath of the financial crisis inflation first plunged, then soared, mirroring the swooping performance of oil prices. That experience certainly prepared central banks for the fact that they might find themselves maintaining low interest rates even as reported inflation rates might be quite high. But, as we have seen, the causes of the latest wave of inflation have been much broader than that and the effects will be longer lasting, creating a conundrum for policymakers.

Having seemingly made the mistake of very loose monetary policy whilst demand was booming and inflation soared, should they now reverse course? Should they tighten monetary policy when inflation is likely returning to normal anyway? Might their actions, along with the unpredictable nature of the bullwhip, ultimately cause an undershoot of demand? But if they do nothing and inflation remains above target, could consumers come to expect higher inflation in the future? And would that mean the forfeiture of the decades of work fighting to anchor inflationary expectations among consumers?

The Bank of England seems to have decided to be proactive on this topic. Its comments conditioned the market to expect two interest rate increases in the first half of 2022 alone. Although this will leave interest rates far below the current level of inflation, this policy stance is quite aggressive by comparison with other central banks. Some way behind is America’s Federal Reserve. It will slowly reduce its asset purchases (quantitative easing) and may increase interest rates by the end of 2022.

Seemingly in no hurry to meaningfully tighten monetary policy is the European Central Bank, perhaps scarred by two misplaced rate hikes during the recovery from the last global crisis, which needed to be quickly reversed and more. Going into 2022 it seems likely that monetary policy will be tightening to some extent.

The one major central bank where there is most room for doubt is the People’s Bank of China. That’s because China faces the same inflationary challenges as the rest of the world and some other challenges besides. The most obvious of these is President Xi Jinping’s regulatory crackdowns. The president has long harboured concerns over the incompatibility of capitalism and China’s broader goals. China, for example, wants to raise its dwindling fertility rate which the high cost of private education was impeding. The government therefore announced that the sector will now be run on a not-for-profit basis with devastating effect for the companies operating in that market. Worried about children spending too much time on their screens? The Chinese Communist Party ruled that children may spend only three hours a week playing video games.

Perhaps the most significant restrictions, however, are those being implemented to address the dysfunctional Chinese property sector. Along with education and health, home ownership is one of the three mountains that Xi Jinping believes Chinese society must conquer in order to deliver a prosperous society. Reforming the real estate sector would mean less speculation in housing – houses for living in, not investing in as the president puts it. It would also reduce the accumulation of financial risk in the Chinese economy.

Collateral damage in this latest push is the former second-largest Chinese property developer: a company called Evergrande. Due to its size, leverage and breadth (across real estate development and the backing of wealth management products) Evergrande is seen as a potentially systemic risk to the financial system. Historically China has been ready to bail out companies that fail to avoid losses to creditors. However, in recent years the mood has shifted towards investors taking responsibility for their own bad decisions. The expectation is that this subtle shift means that investors may pay penance for the lending they offered to Evergrande but that those losses should not be allowed to ripple too far throughout the financial system, and most importantly consumers should be protected from the failure.

So, after a remarkable year for stocks that saw vaccinations and profit recoveries vanquishing anxiety from investors’ minds, there is a new realisation that the path from here may not be so easy. However, the reason central banks have been so reluctant to tighten policy is because unemployment is still too high. The process of bringing it down means getting people into work, allowing them to spend, and driving growth and profits. Anxiety over inflation has to be seen in that context, and in the context of the diminutive returns which can be made keeping money on deposit.

 True of False Quiz Answers

  1. True – Sotheby’s said the decommissioned, remote controlled shredding mechanism was still in the frame. The piece was originally titled Girl With Red Balloon when it sold for just over a million in October 2018, again at Sotheby’s.
  2. Not True anymore – The city of Christchurch in New Zealand has laid off the only wizard in the world believed to be on a government payroll, who’d been making $10,000 a year to perform rain dances and other “wizard-like services” — mainly for tourists — since 1998.
  3. Not True yet – But it will be by 2023.

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For information purposes only. The views expressed are the author’s own and do not constitute investment advice.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 1st October 2021

After a full fortnight including a long weekend of anxious trips between petrol stations to make sure the kids got to school on Monday and everyone made it to work on time, pan-European lorry driver shortages and temporary visas, energy market mayhem, more preparations for COP26 and a Ryder Cup to forget unless you’re American, markets have trudged along.

Market Conditions – 17th September 2021

After a fortnight that has seen a cabinet reshuffle, tax rises and proposals for social care payment reform, vaccines for older children, an incredible win at the US Open Tennis, the UK form a new nuclear security alliance with the US and Australia and John Lewis charter ships to save Christmas, US and European markets have edged down whilst Asian markets have trended up.

Market Conditions – 12th August 2021

After a week that has seen the Olympics close, under 30s told to get jabbed or miss the fun, A-level grade inflation seem anything but transitory, Lionel Messi leave his friends to join a club younger than the entire cast of Friends and the IPCC (Inter Governmental Panel on Climate Change) deliver it’s starkest warning yet about the world’s climate, markets rose.

Market Conditions – 5th August 2021

After a week that has seen the Evergiven (the container ship that blocked the Suez Canal for 6 days causing one of the costliest traffic jams in history) finally make it to the UK, a 13-year-old win skateboarding Bronze for Britain, a back to front Grand Prix restart with just one driver on the grid, travel rules simplify (a bit) and the next planned easement of the quarantine rules for the double jabbed be declared “nailed on”, markets were mixed.

Market Conditions – 29th July 2021

After a week that has seen Olympic joy and heartbreak, the Hundred (yes, we know that is a dirty word in some households) unashamedly produce some of the tightest and most exciting cricket matches in years, the Marble Arch Mound open to much ridicule, UK CoVid cases begin to melt away, the prospect of increased border freedoms and the reduced need to isolate being just a few days away for the fully vaccinated, and Brexit issues with Northern Ireland re-emerge onto the scene, markets on the whole rose.

Market Conditions – 22nd July 2021

After a week that has seen Japan brace itself for the Olympics, cricket launch its latest format ‘The Hundred’, another billionaire leave the planet albeit only temporarily, the start of the ‘ping-demic’ with the Prime Minister and the best part of 2 million others spending ’Freedom Day’ isolating and inflation rise again, markets wobbled and almost immediately recovered ending slightly down.