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September review 2021

Bond Villains

The last day of last month saw the long-awaited release of ‘No Time to Die’, the latest James Bond movie.  Like many, I will be heading off to see it.

But September 2021 was a tough month for investors with broader equity markets enduring their worst month since March 2020. The FTSE All-World index falling by over 2% and moderated by a weaker sterling. Usually, these selloffs in risk assets are associated with a rally in low-risk assets such as government bonds.

In September, bonds, especially those issued by governments, were a large part of the problem and perhaps the villains of the piece.  As the following graph from The Daily Shot shows, UK Government bond yields rose substantially in September to close the month close to 1%, still well below inflation and although cheaper, not offering an attractive investment option.

Other UK bond asset classes from index-linked government bonds to high-yield debt delivered varying degrees of negative returns.  This was much the same in the US, where the situation was clouded by the recurring saga of the US Government running out of money should their debt ceiling not be raised in October; a cue for more US political brinkmanship.  In both the US and UK, the prospect of reduced bond buying by those governments (tapering) and the early prospect of an interest rate rise in the UK, stoked volatility and rising yields (lower prices).

Amid decent economic recoveries on both sides of the Atlantic, a moderation of very easy monetary policy is not unreasonable whatever your views on whether the current spikes in inflation are transient, or not.

One issue for financial markets to assess is whether economic activity is peaking whereas inflation isn’t, leading to fears of ‘stagflation’.  Rising energy prices have fuelled these fears as did panic-buying of fuel at the end of the month in the UK.

Value/growth

As bond yields rose, the commentary was that ‘value’ stocks would fare better than their ‘growth’ counterparts.  As we have noted previously, this is an over-simplistic argument.  In a generally down month for equities, it was banks and energy companies that benefited, plus those sectors benefiting from economic re-opening.  We still prefer thematically driven quality growth businesses with little to no debt that are therefore not negatively impacted by a modest rise in interest rates.

Perspective

While September was a poor month for most asset classes, the third quarter of 2021 was a positive one.  For example, the FTSE All-World was down 2.2% in September but up 2% for the quarter.

Japan

A change of leader of the ruling LDP had little impact as it is more of the same and the LDP is likely to win the forthcoming election. However, Japan was a bright spot in global equity markets as it played catch-up from being a laggard earlier in 2021.  While the US S&P 500 fell 4.8% in September, Japan’s Nikkei index rose 4.9%.

Finding Evergrande, China Cracks

For many investors, investing in China has been a rewarding experience but recent clampdowns by the state are a reminder that China is not a democracy.  Interventions to reduce the power of a number of those large companies in technology, private education and online groceries has dented overseas investors’ confidence.  On top of that has been the realisation that one of China’s leading property developers will need to be bailed out.  While not a ‘Lehman’ moment, it is a sharp reminder of what happens when leverage goes wrong and financing coupon payments over 8% in US dollars isn’t always sustainable.  For those drawn to high coupons/yields, finding Evergrande in their bond portfolio was an unpleasant surprise.  (The T. Bailey Funds have minimal exposure to Chinese equities through our thematic approach and no exposure to Evergrande debt).

Metals and Mining

Commodities had a roller-coaster month with the big winners being oil and natural gas due to demand and supply imbalances.  China’s attempts to exert control over financial assets led to its outlawing cryptocurrencies, merely adding to their volatility.  It’s hard to make a case for investing in fossil fuels at any time and especially ahead of COP26 – so I won’t.  Similarly, while blockchain technology is something for the future, riding the coattails of cryptocurrencies isn’t an investment rationale.

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