Health risks dampen market sentiment, the inflation debate rumbles on
Concerns over the changing health outlook and policy tapering returned to the forefront of economic discussion this week, forcing equity markets lower as investors digest an increasingly uncertain near-term outlook. While the medium to long term outlook remains favourable, supported by strong economic fundamentals and supportive policy, over the week, key market sentiment gauges have moved towards the downside, indicating some weakness in short term sentiment. The CNN Fear & Greed Index, which is calculated using price momentum, market volatility, safe-haven demand alongside a handful of other key indicators, transitioned from ‘neutral’ to ‘fear’ over the weekly time frame. After the exceptional bull market experienced over the past year, as expected, investors are becoming increasingly wary that market conditions could become somewhat more turbulent in the last quarter of the year.
European, UK, and US equity markets declined over the week, adding to evidence of profit taking following strong equity market performance during the third quarter. Central banks are yet to announce the schedule and timeline for tapering asset purchases, and with the pace of recovery beginning to slow, investors are likely to remain cautious while the short-term outlook clears.
Meanwhile in Asia, Japanese equities continue to lead gains as the nation established itself as the world’s best-performing major stock market over the past two weeks, with hopes over the country’s new leadership and accelerating vaccination programme supporting risk-on sentiment. The recent improvement in Japanese equities led to the largest weekly net inflow from foreign investors in the week ending September 10th, as overseas investors purchased a net $9.80 billion worth of Japanese equities. In China, equity markets erased the previous week’s gains, as investors appear split on riding out the regulatory crackdown or reducing their exposure to the region within their portfolios. As we expect regulatory risks to continue to weigh on the outlook for Chinese assets, following last week’s bounce in Chinese markets, we removed the direct Chinese exposure from the OBI portfolios, favouring alternative Asia exposure in its place.
As a result of the overall risk-off shift over the week, all five non-equity sectors analysed have gained over the period. Index-linked gilts were the strongest performer over the period, supported by the UK’s stronger-than-expected inflationary pressures for August, which reached an annualised rate of 3.20%. The remaining sectors marginally gained over the week, as it appears there is little room for bond yields to move lower at a time when developed nations move closer to their pre-pandemic levels of activity and output.
Against this backdrop of short-term uncertainty, the OBI portfolios followed equity markets lower over the week, albeit the accompanying benchmarks experienced sharper falls. The OBI 3 to 5 portfolios fared best in the period to their higher weighting to non-equity assets, while the higher equity weightings created a drag on OBI 6 to 8 performance.
Our Outlook
As we have mentioned in our previous commentaries, as we move into the final quarter of the year, it remains our view that risk assets could face pressure in the short term due to a slowing pace of recovery and regulatory concerns, however we expect policy clarity and positive data flows to continue to support risk asset performance, with economists suggesting that any short-term market declines will be followed by ‘buy the dip’ recoveries. At the same time, we have taken steps to mitigate excess risk where possible during the recent rebalance, and we continue to watch market conditions closely for further clarity on key issues. As a result, while we expect to see further volatility in the weeks ahead, we remain positive on both the 2021 and 2022 outlooks and the ability of the OBI portfolios to navigate this period of uncertainty.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
Key Events We Are Watching This Week:
- Friday 16th: EU Inflation Rate Data.
- Thursday 23rd: Bank of England MPC Meeting and Monetary Policy Decision.
This Day in History
On this day, in 1997, Apple Computer Inc names co-founder Steve Jobs interim CEO, having returned to the firm after they acquired NeXT for $427 million.
Thank you for reading, have a great week!
Jason, Gina & Ben
