Many column inches have been written in June on the subject of inflation and especially the US Federal Reserve’s view of it with regard to changes in US monetary policy. Analysing each word and phrase by Fed Governors to detect changes in nuance would send many to sleep but for financial journalists and analysts this is their world. A similar situation exists in the UK too.
Generally, equity markets had a strong month in June with ‘growth’ stocks rebounding relative to their ’value’ counterparts. However, there was a mid-month wobble for risk assets after the publication of the Federal Reserve’s Open Market Committee’s press release on June 16th. Financial markets dissected the language to mean an acceleration of future monetary tightening and a scaling back of quantitative easing (QE) via their bond purchases.
The following graph sourced from the US Federal Reserve is part of what caused the market wobble. To summarise the graph, the chances of a rate increase in 2022 have increased slightly and there could be two further increases in 2023. In reality, US short term interest rates, as indicated by the Fed Funds rate, could be edging towards 1% in 2023. While bond markets took this in their stride with longer-term interest rates lower on the month perhaps encouraged by the Fed’s amended focus, equity markets wobbled probably due to some leveraged participants scaling back their borrowing in the face of higher interest rates on the horizon. The taper tantrum that upset financial markets in 2013, but remains fresh in many investors’ minds, didn’t materialise in June 2021.
The Bank of England has been having similar discussions but like its US counterpart, sought to calm investors’ fears by maintaining ‘rising inflation is transitory’ and retaining its wait and see stance regarding the state of the economy. Will the UK housing market remain as buoyant now the stamp duty holiday has ended? Is the backlog of orders inflated by over-ordering? Will the gradual ending of subsidies reduce consumer spending? As we have commented on previously, it is too early to make any realistic predictions on inflation. Economic predictions are usually wrong.
One thing that has become apparent is that reading numerous articles about tiny changes in future interest rates has the potential to be of use to insomniacs.
Despite bouts of volatility, the VIX index has tapered lower in 2021.
The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The VIX, often termed as the “fear index,” is calculated in real time by the Chicago Board Options Exchange (CBOE).
Mind the Gap
July 1st is the date when the UK Government began to roll-back its furlough scheme and reduce the generosity of other business benefits such as delayed VAT payments and business rates relief. This tapering of emergency measures instigated last year will need to be watched for its impact on companies and the economy as a whole. Companies will now pay 10% of the 80% furlough payments and a number of businesses are saying that will tip them over the edge. The buoyant economic background envisaged may well be impacted to the downside as although many point to the staff shortages in economic re-opening businesses, if those companies suffer the double-whammy of reduced subsidies and higher wage costs, they might not survive.
Whether the above situation was a factor behind Gap’s announcement to close all of its UK and Irish stores and whether that decision was a reflection of a brand that has lost its popularity, their decision to go solely to being an online retailer is another blow to the high street and its employees.
Equities had a good month despite a mid-month dip. The recent resurgence of UK equities was interrupted as the FTSE UK All Share underperformed the FTSE All World by 4%, the former being flat in June. Stocks with a growth label bucked this year’s trend of underperformance versus those with a value sticker with the US equity market leading the way among major indices.
Bond markets had a positive month and credit markets remained at tight spreads to government yields.
Metals had a mixed month but were generally in negative territory with gold giving up its gains from May. Industrial metals seemed to suffer from the indigestion of speculative long positions after a strong run this year.
Oil had a strong month on the back of good short-term demand in the face of ever-increasing government backing for climate change measures and a commitment to end fossil fuel developments.
We believe many, including one or two notable financial market pundits, continue to misunderstand the cryptocurrency debate. Bitcoin once again demonstrated what a wild ride it can be for its holders. As we have noted before, the energy usage from Bitcoin mining is of the scale of a large European nation. Governments are not likely to want its adoption yet the attractions of blockchain technology and its transparency are not lost on them.
The likelihood of higher US interest rates albeit at the margin, helped the US dollar improve over the month of June having probably been oversold.
In summary, we find the ‘value vs growth’ argument in equities to be a spurious one. Such labels are overused and often inaccurate. As thematic investors for over twenty years, we continue to believe the real value in investing is in growth themes that will be in demand for the rest of this decade.
Towards the end of June, we were delighted to learn that the T. Bailey Dynamic Fund has been selected as one of the top five Mixed Asset funds in the FTAdviser Investment 100 Club which recognises “The most outstanding funds and asset managers across 20 key categories.