Summary

  • Despite US equity markets making headlines for hitting new highs, strong corporate earnings growth through 2021 means they are slowly creeping into their still elevated valuations. We do not feel exuberant but believe forecast strong economic growth and the strength of corporate earnings offers some option for this process to continue.

  • Whilst the initial economic rebound from last year’s shutdown has been swift, continued recovery faces the headwinds of the Delta variant and supply bottlenecks, both of which stand to suppress growth. Whilst above-trend growth lies ahead for this year and next, these forecasts have edged lower of late.

  • Central banks are flagging the winding down of some of their ultra-supportive central bank policies. The Bank of England is set to curtail its bond purchases (QE) by the end of this year; similarly, the ECB is set to cease its Pandemic Emergency Purchase Plan in the early part of next year. The US Federal Reserve, the most crucial of all central banks, is signalling a gradual unwinding through to mid-2022.

  • This seems timely but raises the prospect of rising volatility if central bank messaging gets misconstrued. The ‘lower for longer’ interest rate narrative continues, with no rise in interest rates until late 2022 in the States and further out for the ECB. The Bank of England may move earlier than both but a slowly rising rate environment, with a lower terminal rate, remains our base case. We continue to use strategic bond funds and short-dated fixed income funds to shelter from rising yields.

  • Developed market equities have had a relatively benign summer period. Emerging markets and Asian equities have been held back following increased Chinese regulation in several sectors as well as concerns about the solvency of a major property developer, which jolted markets. Virus setbacks in Asia compounded these issues.

  • Inflation needs to be watched as supply disruptions are becoming more stubborn and taking longer to resolve than anticipated. Transit and raw material costs may well begin to alleviate but what remains in question is how much wage inflation will become embedded as we go through annual pay rounds across the economy as a whole, beyond those where wage rises are being driven by an immediate and acute shortage of labour.

  • Virus setbacks requiring a return to lockdowns are looking less likely in the US, UK & Europe but remain a source of risk in many other regions, particularly given the unequal global distribution of the vaccine.

  • Sterling remains stronger than the euro and yen year to date but has recently weakened against the US dollar.

  • Both gold and oil have continued going their separate ways. Gold continued weakening closing around $1750/oz, whilst oil prices finished the quarter at $77/barrel for Brent Crude.

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