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21st September 2021
Cappuccino Commentary
A relaxed read on the issues of the day
Equity markets continued to deliver positive returns in August, building on the momentum that was established at the end of 2020. Supported by high vaccination rates, easing lockdown restrictions and economic stimulus, returns have been particularly strong in the US and European regions. Meanwhile, Asian and emerging markets equities continued to lag those in the west, although the difference in performance was relatively narrow during August. With investors feeling confident, assets continue to flow away from ‘safe haven’ investments such as government bonds and into equities and ‘riskier’ parts of the bond market. Returns from government bonds have been negative this year, although the strong returns from equities will have more than offset the impact in a medium risk portfolio.
China continued its regulatory crackdown and having intervened in the education sector in July, August brought new restrictions limiting online gaming. Coupled with rules on the foreign ownership of Chinese businesses, these announcements (which took investors by surprise) have dented confidence in Chinese equities, with investors moving their money away as a consequence. The effects have been felt throughout Asian and emerging markets, where China’s economy has a considerable bearing on the wider region. The turmoil may present an opportunity for the long term investor to take advantage of cheaper valuations, although in the short term it could be a bumpy ride.
The spread of the delta covid variant continues to cause concern, although far fewer deaths are being recorded in the west. Elsewhere, vaccination levels are low and covid continues to impact the local and global economy as production and supply chains come under pressure. The impact has been felt throughout the world, but has challenged UK businesses in particular, compounding problems from new regulation following Brexit. UK businesses are reporting very low stock levels and long lead times from suppliers, with many also hampered by labour issues.
Going forward, the policies of central banks and governments will continue to support economic growth, with vaccination programmes steadily eroding the risks from covid. This should be a good environment for investors and consequently markets have the potential to keep moving up. The strength of the rebound in asset prices since March 2020 has been considerable and we think markets could be more volatile from here, but given the levels of support, we think markets have further to run.