Positive sentiment pauses as investors reassess near-term growth expectations
Concerns over future policy returned to move markets this week, as investors searched for clues over the Fed’s timeline for tapering bond purchases in the minutes released from its latest policy meeting. After strong equity market performance in recent weeks, investors paused to reassess growth expectations amid delta variant concerns, slowing growth in China and policy tightening expectations as the global economy recovers from the Coronavirus pandemic.
Following the trend we have highlighted at various points throughout the year, markets demonstrated considerable volatility over the week as investors grapple with continued short-term uncertainty, with today’s market movements reflecting a cautious shift in sentiment as investors digest recent data from the US. While the news that the Fed may be looking to start reducing the amount of liquidity it has been injecting into the US economy since the outbreak of the pandemic by the end of 2021 does not come as a surprise to most economists, the market reaction we are seeing today reflects a tempering of the optimism observed in recent weeks. Alongside future policy concerns, uncertainty has been growing over future growth owing to a number of potential headwinds, including the persistent spread of coronavirus and slowing growth in China. While these risks are likely to endure in the months ahead, they have remained key considerations in our decision making over the year, and have not impacted our positive outlook at this stage.
Looking at the equity indices, which reflect the data to yesterday’s close (therefore don’t include today’s movements), we can see declines in the majority of the indices, with Asian markets experiencing sharper downward movements on the back of the recent regulatory pressures on Chinese stocks and concerns over the spreading of the delta variant across the continent. German stocks fared somewhat better than other European peers over the week after industrial stocks performed strongly while growth sectors such as technology declined.
Following the increase in risk-off sentiment in markets over the week, the non-equity sectors monitored in the dataset below experienced better performance overall, with the exception of inflation-linked gilts which declined as inflationary concerns abated somewhat. Lower risk sectors experienced the best performance over the week, with government bonds and high-quality corporate bonds recording positive movements over the week, while higher risk high yield bond returns remained flat.
Against this backdrop, the OBI portfolios experienced relatively flat performance over the week. OBI 3 to 5 contributed positively to performance owing to a lower risk portfolio allocation, while OBI 6 to 8 experienced marginal declines as equity exposure acted as a drag on performance over the week. After building up a healthy outperformance against the benchmarks for the last month, the benchmarks performed slightly better over the week owing to their exposure to government bonds, however we expect this to be a temporary effect as downward pressure on these assets returns in the coming weeks as positive momentum returns.
After the strong performance observed since the start of the year, it is key to remember that market volatility is completely normal. Pullbacks are needed to reset markets and expectations at this stage of the cycle, and to stop market optimism from getting ahead of itself. As such, while today’s market movements are significant, it is our view that this most recent bout of volatility will act as a short term pause in bullish behaviour before positive sentiment returns and leads markets higher. Market fundamentals remain supportive of risk assets moving forward, and economic conditions remain favourable, with risk assets well supported by robust corporate earnings and strong growth expectations for the remainder of 2021 and onwards.
Overall, given favourable macroeconomic tailwinds over the long term, we are not concerned about the volatility we are seeing this week and we remain optimistic on the opportunities that may emerge throughout the rest of 2021 and beyond.
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 19th: UK consumer confidence data for August, Japan inflation rate for July
- Wednesday 25th: German business confidence for August
This Day in History
On this day in 1897, the London Electric Cab company began operating electric-powered cabs in the West End and The City… but with a top speed of only 9mph, they were withdrawn in 1900.
Thank you for reading, have a great week!
Jason, Gina & Ben
