Preparing for Policy Change
Financial markets remained steady ahead of the Fed’s latest press conference on Wednesday, with investors poised to act on Chairman Jerome Powell’s latest economic update. The inflation narrative remained a key focal point ahead of this month’s Fed meeting, and after a couple of weeks of downgrading their inflation forecasts after May’s peak inflation expectations, the Fed’s latest policy update prompted investors to reassess their views on inflation and interest rates moving forward. US GDP growth is expected to be stronger in 2021 than previously thought, leading the Fed to forecast a higher inflation environment over 2022 and 2023. The latest Fed update remains in line with our macroeconomic expectations, and the OBI portfolios are expected to respond well to the news following the allocation changes made earlier this month.
On the whole, equity indices gained over the week, with only two indices posting declines in the table below. The declines have come from the FTSE 250 and the CSI 300 this week, with the FTSE 250 coming off year to date highs. Meanwhile, we have seen Chinese equities impacted by a crackdown on its shadow banking sector as well as a reluctance by policy makers to add further liquidity to markets. Europe has been a stronger performer through the week, while the S&P 500 struggled for direction as a result of uncertainty over future Fed policy. As observed in recent weeks, the fixed income indices have positively responded to short-term uncertainty, however we see this as being a temporary movement as markets are expected to become more risk-on as we progress throughout the year.
Turning your attention to the OBI portfolios, all of the strategies have moved in a positive direction this week. Uncommonly, the lower risk strategies have performed the strongest, making great strides towards their annualised return targets. Within these lower risk portfolios, the limited equity exposure is primarily achieved through high quality multi-asset exposure, and these assets have benefitted from strong diversification in asset classes over the week. As we move further up the risk spectrum, our clean energy and UK exposure has driven the gains in the OBI Active 8 portfolio this week as investor sentiment around the UK continues to improve, meanwhile US and Chinese exposure has slightly dragged on the performance as uncertainty continues to surround the events mentioned above. The AFI benchmarks have had a strong week as government debt and growth-oriented assets experienced positive performance, however we expect this to reverse as investors adjust their portfolios given the Fed’s more bullish outlook on the economic recovery and inflation.
Despite the Fed having just raised their growth and inflation expectations, Fed chair Jerome Powell acknowledged that the outlook remains incredibly uncertain, and that the inflationary pressures may continue to rise higher than expected as we progress through the coming months. Investors, economists, and executives remain divided on their inflationary views regarding how strong and how persistent inflation may be, and we have previously acknowledged that it is impossible to accurately forecast these things. That being said, the portfolios are positioned to benefit from a number of potential scenarios that may unfold, and we are constantly assessing markets to identify any new risks and opportunities as they arise throughout the recovery.
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.
Last week, we noted the UK inflation data and the G7 summit as two other key events to watch. The UK inflation data came out stronger than expected at 2.10% for the 12 months leading up to May, with prior forecasts expecting a 1.80% rise. The inflation outlook is less of a concern within the UK and Europe than the US, with the latter’s stretched equity valuations making this market more susceptible to changes in inflation expectations. With that being said, investors will likely be eyeing up the BoE’s interest rate decision next week, not on the expectations of an interest rate in the short-term, but instead with a focus to see how monetary policy committee members adjust their interest rate hike forecasts. In other news, although the G7 Summit did not cause significant volatility in financial markets, the meeting likely set important strategies and an alignment of international expectations that may have key implications for the next 12 months. Throughout the year, we could see greater collaboration in dealing with China and Russia, Brexit, climate change and the global pandemic.
Key Events We Are Watching This Week:
- Thursday 24th: Bank of England Interest Rate Decision.
- Friday 25th: US PCE Price Index.
This Day in History
On this day, in 1885, the dismantled Statue of Liberty, a gift of friendship from the people of France to the people of America, arrives in New York Harbour after being shipped across the Atlantic Ocean. This friendship remains intact today, with Emmanuel Macron attempting to establish his own ‘special relationship’ with President Joe Biden at the G7 Summit this week.
Thank you for reading, have a great week!
Jason, Gina & Ben