Investment Management -
Our Co-CIO, Gregory Perdon shares insights from across the globe, key market developments and recent Investment Committee decisions.
Will it be temporary or will it last? That’s one of the biggest questions on investors’ minds, as US consumer prices marked their biggest jump since 2009 in April - surprising economists, policymakers, and professional investors alike. The gains were broad based - taking hold in nearly every major inflation category. So, what was the annualised inflation number? +4.2% which is significant and will draw investors’ attention going forward.
What about jobs, thought to be the bellwether of the US economy (alongside the housing market)? Well, there were some eyebrows raised last week as April’s employment growth was weak, with the economy adding ‘only’ 266,000 jobs, which was just one quarter of what was expected, yikes…
Conclusion? Higher prices plus less than impressive employment equals disappointment and leads to Chinese whispers about a big word which hasn’t been mentioned in a very long time: stagflation (rising inflation and high unemployment).
Our take? Too early to say with high conviction, but we’re with the Fed and believe we’re in the middle of a period of transition rather than at the start of a significant inflationary spike. It’s normal for an economy that is re-opening to experience shortages which can lead to increased prices. We would also expect the jobs recovery to be uneven as workers hesitate to go back to work (or socialise) and companies exhibit cautious hiring policies – we just hope that doesn’t last.
There was a period not too long ago during which it felt like there was only bad news emanating from the UK; how the tables have turned! Last week, the Bank of England lifted its 2021 annual growth forecast from 5% to 7.25%, the highest level in almost 70 years. According to payment card data, UK consumer spending finally rose above pre-pandemic levels in April, encouraged by many sectors reopening and vaccinated folks starting to book holidays. On top of that, the Office for National Statistics (ONS) reported that Britain’s exports and imports continued to recover in March.
We appear to not be alone in our optimism for the UK re-opening. The British Pound - a lightning rod for sentiment around the prospects for the British economy - continues to shine, gaining over 3% against the US Dollar, 4% against the Euro, and over 9% against the Yen year-to-date. The good news is that our clients have benefitted as we maintain positions in the Pound against the three pairs mentioned in our flagship discretionary investment portfolios.
What is the big debate in monetary circles? When will the ECB begin to hint at monetary tightening? But let’s not put the cart before the horse, we believe Europe still needs a proper recovery first. Yes, some members of the ECB Governing Council are pointing to economic activity and medium-term inflation becoming more “tilted to the upside” - which is encouraging - but realistically, we don’t think they will curtail their emergency bond buying programme anytime soon.
What could change that? More aggressive vaccination rollouts and faster implementation of the EU recovery fund. It’s difficult to opine with certainty on the speed of the €800bn funding programme (green investments, digital projects, and reforms to the public sector) but many said that it wouldn’t happen to begin with, and we now have member states submitting their plans for spending.
Looking at vaccine rollouts, the Europeans were lagging but are now catching up relative to the UK and the US. The EU posted a higher vaccination rate than the UK and US for the first time on 6 May, whilst Germany has outstripped them every day since 30 April . What’s this down to? A jump in the supply of vaccinations.
Support for the Japanese Prime Minister is fading fast. A combination of factors is contributing, such as the growing dissatisfaction over his handling of the pandemic and the vaccine rollout. Will this result in a change of political power or only the Liberal Democratic Party (LDP) leadership? Polls indicate that none of the opposition parties have enough backing to push out the LDP, but could the PM be ousted this Autumn? We believe there is that potential.
Besides, what has been even more elusive than the Summer Olympics? Well, inflation, so the Government may try to manufacture some. How can it do that? By creating wage pressure. The Government’s aim is to raise average minimum wages to 1,000 yen (US$9) an hour as soon as possible. Will it happen? We think it could, but that there could be a backlash from SMEs as an increase in wages might put pressure on their margins.
Inflation fears are alive and well in China, but should we be worried? China's producer price index (PPI) rose 6.8% in April from a year earlier – this against the backdrop of concerns over food price inflation. That said, the Chinese government is artfully attempting to ensure the growth is not too hot, as evidenced by their attempts to moderate credit growth and money supply. It’s a balancing act which, thankfully, is much easier to manage when you’re a command-and-control economy, hence our view that they will successfully orchestrate the soft landing that professional investors always hope for.
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