Investment Comment September 2021

The collapse of Afghanistan’s US-backed government and the end of the 20-year war dominated news flow in August but the events did little to disturb global equity markets which continued to rally. However, inflationary concerns which have been driving markets this year, showed no sign of disappearing as rising raw material costs and supply chain disruptions continued globally.  Market sentiment continues to be dictated by the Federal Reserve’s timeline for tapering and interest rate rises, as well as the ongoing uncertainty surrounding technology regulation in China.

US equities enjoyed another strong month in August, as the MSCI USA index rose 3.97%. However, some economic indicators did fall short of analyst expectations. The relatively poor vaccination uptake and resulting Delta variant spread led to only 235,000 jobs being added to the economy in August, considerably lower than the forecasted 750,000. Although progress towards pre-pandemic levels of employment appears to have decelerated, August’s flash PMIs of 61.2 and 55.4 for manufacturing and services, respectively, still indicate that the economy is expanding. This was also evidenced in the recent inflation reading of 5.4%, still at a decade high. Nevertheless, Jerome Powell’s speech at the Jackson Hole Symposium towards the end of the month reassured investors that the Federal Reserve is content with the progress made on inflation, but comments were consistent with expectations that tapering could begin this year. Markets seemed content with this having been buoyed earlier in the month by the announcement of more fiscal stimulus, this time in the form of a $1.2 trillion infrastructure bill focusing on sustainable and ‘real’ infrastructure.

After Asia Pacific equities were rocked in July, the MSCI Asia Pacific ex-Japan index rose 3.22% in August. Chinese equities continued in a volatile fashion in August, but unlike most months since February, the MSCI China index return was marginally positive on the month. Chinese authorities did however continue with notable market interventions, this time in the Gaming industry, where they introduced a law to limit gaming time for minors to three hours per week. As Xi Jinping’s second term nears, further social intervention policies are expected which might explain why, despite the recent strong earnings reports, many of the well-known Chinese companies’ share prices languish some way off their February 2021 highs. Elsewhere, Indian stocks continued their strong form in August, aided by the central bank’s recent loose monetary policy and fall in crude oil prices.

The MSCI Europe ex-UK index rose 2.74% in August, marking seven consecutive months of positive returns, the longest positive streak in eight years. Europe’s disjointed reopening means that it lags the US and UK in terms of economic recovery, but the region has now vaccinated over 70% of the population and hospitalisation rates are much lower than in previous waves. Eurozone inflation reached its highest level in nearly a decade in August as the harmonised CPI exceeded expectations to reach 3%, up from 2.2% in July. The increase has been driven by the recovery from the pandemic, higher energy prices, supply chain bottlenecks and the reversal of last year’s VAT cut in Germany (where inflation reached 13-year highs of 3.4%). Inflation increases may provide some justification for more conservative European Central Bank (ECB) rate-setters who are expected to push for a slowdown in the rate of bond purchases under the pandemic emergency purchase programme (PEPP) when they meet on September 9th. However, like the Federal Reserve, the ECB has previously indicated that it will tolerate higher inflation before raising rates or reducing asset purchases.

UK equities delivered a moderate return in August, as the MSCI UK index rose 1.88%. Small and mid-cap equities fared particularly well, buoyed by continued M&A speculation. Low valuations coupled with cheap financing and a favourable regulatory backdrop has led to the UK becoming a hotbed for global dealmaking. Already this year there have been 39 bids – two shy of the 2020 total – half of which have been proposed or completed by private equity firms. Jobs data for Q2 continued to improve, with unemployment now only 0.8% higher than pre-pandemic levels. Policymakers are confident that with job vacancies currently at record highs, the furlough scheme can unwind successfully at the end of September. The Bank of England now expects inflation to hit 4% by the year end, despite a slight softening to 2% in July. Consensus is still that inflation will be transitory, but the central bank has alluded to a moderate tightening of monetary policy over the next two years.  August saw UK house prices record their second largest monthly gain in 15 years, rising 2.1% compared with July. The stamp duty ‘holiday’, low interest rates, high household savings and the need for increased homeworking have driven the UK housing market up 11% year on year, but with the stamp duty holiday expiring at the end of September, activity is expected to soften in the near term.

Japan led the major global equity markets in August, with the MSCI Japan index up 4.13% over the month. This is perhaps reflective of Japan’s economy rebounding more than expected in Q2 this year, with consumption and investment expenditure recovering from the pandemic’s initial hit. Japan’s struggle to contain the virus is persisting however and the consensus is that the current state of emergency curbs reimposed to combat a spike in infections will weigh on household spending in the coming months. The success of the recent Olympic Games did not serve to improve the popularity of Prime Minister Yoshihide Suga, who, on 3 September, announced his intention to resign ahead of the upcoming Liberal Democratic Party (LDP) leadership election. The news was well received by markets, with commentators anticipating higher fiscal spending from Suga’s successor.

Market sentiment in August was again driven by global central bank rhetoric, with the Federal Reserve and the Bank of England both intimating that some degree of policy tapering will commence either this year or next. All of the major Central Banks thus far have been careful navigating the new higher inflation environment, conscious of the effect any sudden policy shift may have on markets. But with PMIs indicating that some developed markets are past peak rates of growth already, the challenge faced by governments and central banks will be ensuring growth is not extinguished in their efforts to return economies to their pre-pandemic norms.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.