During the one-month period to 31st October 2021, major equity markets, as measured by the aggregate FTSE All – World Index, rose moderately, with gains of between 3% and 6%.The UK narrow and broader indices both rose about 2%,now up over12% since the year end . The VIX index fell sharply to a level of 16.46, now down about 28% over the year to date, reflecting increased risk taking. Government Fixed Interest stocks rose over 1%, mainly following the end October budget while other global 10-year bonds fell in price terms. The UK 10-year gilt ended the month on a yield of 0.97% with corresponding yields of 1.57%, -0.11% and 0.09% in USA, Germany and Japan respectively. Currency moves featured a stronger dollar and firmer pound, while commodities were generally firm, especially in the energy area.
In terms of global economic data, there have been a few official GDP downward growth revisions in the most recent period, after the strong second quarter rebound, in both developed (especially China and USA) and emerging economies, and more “live†data suggest some softening in nearly all markets. Inflation indicators, at least in the short term, have moved upwards for any number of well documented reasons, and the definition of “transitory†appears very flexible. The latest OECD inflation forecasts are 3.7% and 3.9% for 2021 and 2022 respectively. The IMF latest report predicts 6% global growth this year falling to 4.4% in 2022 but highlights the considerable regional variation. COVID-19 developments during the month featured accelerating cases in some areas (Northern autumn, school return) and a growing debate re the global distribution of vaccine. Uneven vaccination rates and levels of lockdown stringency (enforcement and adherence) continue to influence government support measures and Central Bank actions. The tone of the very recent Major Central Bank meetings has become more hawkish re relaxing QE and interest rate moves, and a number of other economies e.g. Russia, Norway,Hungary,Brazil,South Korea,Russia,South Africa and New Zealand have already started raising policy rates.
At recent meetings, Jay Powell said that the Fed could announce a “taper†of its asset purchases in November, with a possible end to the bond buying programme by the middle of 2022. Recent US Federal Reserve meetings have moved the emphasis from unrestrained support for growth and financial markets to the long process of winding down stimulus and eventual tightening.
Recently announced inflation indicators showed headline CPI to end September rising at 5.4% over the year, marginally below some expectations. Latest employment figures have shown a weaker than expected bias with great variation between sectors. As well as lower overall job creation, the figures indicate a relatively high cohort leaving the labour market overall. Provisional second quarter GDP growth of 6.5% was lower than some estimates as was the preliminary figure of +2.0% for the third quarter. Recent consumer sentiment indicators and provisional PMI figures have all shown a pause in activity/expectations. Independent economic forecasts are now expecting over 6%-7% GDP growth for full year 2021 with the unemployment level at around 4.5%.
Recent ECB meetings have seen interest rates maintained at -0.5% and a continuance of the pandemic bond buying programme a stance reiterated at the meeting on October 28th. It is currently expected that more definitive statements re QE and monetary policy will be made at the November/December meetings. Official second quarter GDP figures and flash third quarter figures just released (+2.2% ,higher than expected) and very recent European sentiment surveys have pointed to a varying but generally positive trend, although the very latest PMI’s showed some noticeable deterioration in the manufacturing sector in no small part due to shortages/bottlenecks in the supply chains. The EU commission currently expects 4.8% economic growth this year.
October Eurozone inflation stands at 4.1 %, a 13 year high and surveys suggest that many companies are likely to pass even more factory gate price increases to consumers over coming months. A recent poll by the European Commission showed that European consumer’s inflation expectations were at their highest since 1993.
Political developments have been dominated by Germany, where the SPD are edging towards a coalition with the Greens and the FDP.Elsewhere Poland continues a constitutional standoff with the EU…while corruption issues have led to changes in the Austrian government.
Asia excluding Japan, led by China (across all sectors and property), continues to remain in reasonable economic shape although the recent news flow has been dominated by Covid issues. On July 20th the ADB released a pan-Asian 2021 growth forecast of 4.0% (compared with a projection of 4.4% earlier this year), with significant country variation e.g. Vietnam against Thailand, the latter very dependent on tourism. Recently, South Korea become the first big Asian economy to raise interest rates since the start of the pandemic as record household debt and soaring property prices eclipsed fears over struggles to contain the Delta Covid variant.
China is experiencing some significant economic deterioration after a positive start to 2021 with industrial production, factory output, retail sales, investment spending, property transactions all weaker than expected, and third quarter GDP growth just reported of “just†4.9%. Some “self-imposed†factors e.g., earlier curbing of steel making for environmental reasons have accompanied flooding, virus breakouts, power shortages and related restrictions and the most recent manufacturing PMI dipped below 50.Direct and indirect effects of the Evergrande debacle and a possible new tax are also rippling through the property sector, a significant Chinese GDP component. To kickstart some manufacturing activities, ease power shortages, the authorities have reactivated parts of the coal mining industry, granted some relief to power stations and intervened in the power pricing mechanism.
The regulatory crackdown which had affected a variety of sectors e.g. online tutoring, video gaming, property development, luxury goods and private equity, to name a few has quietened “somewhat†but there is a sense that controls could re-appear at any time.
While there have been no major changes in Japan’s economic trajectory, politics have moved more centre stage with the appointment of a new head of the Liberal Democratic party, Fumio Kishida. The most immediate task of the new leader is to lead the party into a lower house election, that must happen before the end of November. Kishida has signalled that he intends to continue Abenomics for now, but he also has a longer-term goal of a fairer distribution of income. The main economic impact is likely to the continuation/acceleration of a huge stimulus package. The economy grew at an annualised rate of 1.3% in the second quarter higher than some forecasts but still low relative to other G7 countries. At corporate level however, shareholder activism is rising and some of the undoubted value in the market is being unlocked by private equity and other transactions.
Within the UK, live activity data shows a clear pause in activity following the buoyant second half recovery for several reasons, and certainly a change in the mix of the growth drivers. The composite PMI Index covering August showed an unexpected drop to 55.3, both services and manufacturing, citing staff shortages and other supply constraints as the major reasons, while the more recent “Flash PMI†for September showed a continuation of this downtrend.
A skills/age, geographical mis match following the end of the furlough scheme, possible Universal Credit top-up withdrawal, HGV driver shortage, scheduled utility bill increases, public sector strikes, selected VAT hikes, fuel and shop prices and merchandise availability, tax/NI hikes, upward interest/mortgage rate pressure, pension triple-lock suspension and lingering COVID concerns will inevitably lead to more economic uncertainty over coming months. The recent Budget (below) does little to offset these headwinds for many people.
The Budget-The Office for Budget Responsibility forecasts, released on October 27th, show expected growth of 6.5% this year and 6% in 2022, still leaving the economy approximately 2% behind “pre-Covid†levels. The OBR central forecast for CPI is for an increase of 4.4% by spring next year, and not to return to the official 2% target until 2025. The main thrust of Chancellor Sunak’s statement was to spend part the projected OBR windfall (borrowing less than expected) on public services, but taxation is also set to rise to the highest level since 1950.
The average of leading independent economists now expects UK growth of 5.5% for 2021), lower than earlier year estimates and leaving GDP still short of pre-pandemic levels.
Forward looking independent economic growth estimates cover a wide range, as the positive argument of relief/catch up spending, by an element of the population from records savings (11.7% estimated by ONS for Q2 2021) has to be balanced against the factors laid out above. Very recent credit card data etc has shown a consumer tendency to pay down debt etc over coming months in the light of many uncertainties.
The minutes of the most recent MPC meeting and a speech by Andrew Bailey have reinforced the more hawkish tone, indeed suggesting the that the MPC could be ready to raise interest rates slightly as early as this week.
Monthly Review of Markets
Equities
Global Equities showed moderate gains over October 2021, the FTSE ALL World Index registering a climb of 4.3% in dollar terms. The UK indices, rose by between 2% and 3%, now up by about 12% since the beginning of the year. Chinese equities continued to slide, driven more by Everglade and lower economic growth estimates than prior regulatory concerns. The VIX index fell sharply, ending the month at 16.46, a fall of 28% since the year-end.
UK Sectors
Banks, resources, utilities and property were the standout sectors during October, the former gaining over 9% on better than expected results and higher interest rate expectations. Some more domestic sectors, however, suffered partly on renewed Covid concerns e.g. travel and leisure, which lost 6% during the month. Since the beginning of the year, UK smaller company funds have significantly outperformed equity “income†funds which have, in turn, matched the “average UK fund.â€. Mixed asset funds have shown growth of between 2% and 9%, depending on the equity weight, since the beginning of the year (Source Trustnet 27th October 2021). The FTSE private client indices show similar year to date returns (Source FT 30th October)
Fixed Interest
Gilts received a boost after the unexpected Budget supply announcement after price falls over the previous weeks, the UK 10-year yield for instance finishing the month at 0.97%. Other ten-year government bond prices showed more persistent price weakness with closing ten-year yields of 1.57%, -0.11% and 0.09% in USA, Germany, and Japan respectively. Year to date, the UK Government All-Stock Index has fallen 6.95%. Corporate bonds also rose marginally over October in price terms as did more speculative grades. Core preference shares have significantly outperformed gilts in capital terms this year, while also offering income yields in the range of 5% to 6%.
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Foreign Exchange
A more volatile month for currencies with sterling gaining nearly 4% against the Japanese Yen and about 1.7% against the US Dollar and the Euro. The Chinese Renminbi continues to move in a tight (semi-managed!) band versus the Dollar, finishing the month at 6. 3993. Currency moves have amplified the £ adjusted performances of overseas indices, the S&P for instance outperforming the Nikkei by around 26% so far this year in sterling terms. See my graph below for the effect of hedged Japanese exposure, in this example IJPH (brown) versus MSCI Japan(black).
Commodities
A positive month for commodity prices, especially in the area of oil, iron ore and coal (see below), the latter more Chinese driven. Gold stabilised somewhat, still in a narrow price channel for several months.
