Monthly Note - November
Economists have trimmed their outlook for U.K. growth next year by an average 0.4 percentage point to 5.1%, the sharpest cut for any major European economy. Survey respondents expect no increase in the BOE's key rate until May, with another hike coming in November. That's in stark contrast to signals from the money markets, where investors have loaded up on bets for tighter BOE policy as soon as the end of this year. Meanwhile, property prices in the UK have risen in every single region, London included, with the average asking price hitting £334,445. Property experts believe part of the resilience in the market is down to a rush to do deals and lock in lower fixed mortgage rates before a Bank of England rate rise.
European Central Bank President Christine Lagarde warned that the globalized nature of the euro area’s economy makes it highly vulnerable to systemic shocks from supply chain disruptions. Lagarde also said the current spike in inflation is unlikely to last, while vowing to continue aiding the euro-area economy as the fallout from the pandemic lingers. Supply bottlenecks, cost pressures, and a reopening let-down are already set to plague region’s third-quarter earnings season.
U.S. Federal Reserve Chair Jerome Powell reiterated on Friday that “it’s time to taper,” shorthand for the slow removal of financial supports that held up a once pandemic-stricken economy. But he also sounded a note of concern over persistently high inflation. Despite his position that it won’t be around past 2022, Powell said supply chain bottlenecks could complicate matters since they may “last longer than previously expected, likely well into next year.” Markets—which were already being pummelled by a technology stock selloff—turned even lower on his comments.
China Evergrande Group pulled back from the brink of default by paying a bond coupon before this weekend’s deadline. Bondholders will receive the funds before Saturday, according to people familiar, which just about meets the 30-day grace period since the firm missed the original payment date. Speculation about a default has been swirling for months, stoking credit-market contagion among other cash-strapped developers, and eroding confidence in a Chinese real estate market. BOC International said the move ``looks like an attempt to kick the can down the road.’’
The macro backdrop remains supportive for risk assets, such as equities, which will benefit from further expanding global economic growth. Some value equities offer more immediate upside over their growth peers, as they tend to benefit most from strong recoveries after recession. We are taking a more cautious approach to portfolio positioning for a possible resurgence in inflation. We still like selective growth stocks where there remains true innovation and potential for change, especially recent trends in consumer behaviour being driven by the pandemic. Fixed income remains unattractive given record low (and negative) real yields and the thin spread between sovereigns and corporates offering little in the way of reward for risk. Bonds remain an important diversifier in our portfolios, but given current yields the return profile looks unappealing, with downside risk in long-dated government bonds extremely elevated given the outlook for interest rates and recent commentary from major investment banks regarding monetary tightening. Low duration bonds therefore look the more appealing investment, along with inflation-linked bonds which offer some protection to rising inflation. We also hold an allocation to cash to offset some of this fixed income risk.
We expect the UK to continue to recover well from the pandemic as the widely successful vaccine rollout and ending of pandemic restrictions in England boosts economic activity. The UK has some of the highest forecasted GDP growth in the world which should feed through to corporate profits which we expect to rise. Valuations in the UK remain extremely attractive given the outlook for the economy.
There is good value to be found in European equities, particularly given the recent pick-up in the EU’s vaccine programme. Earnings growth has been strong during this period, as has stock market performance, however we see little catalysts for further growth and as such have moved to an underweight in European equities.
The US represents poorer value relative to the rest of the world due to the high proportion of tech companies that currently command a multiple far in excess of the broader market, however it also has the best long-term earnings growth and some of the most outstanding quality companies, as well as the most innovative. We believe the US will remain an attractive investment option, but with some obvious headwinds making us more cautious. President Biden has made no secret of his desire to increase tax rates, and the Federal Reserve have been clear they will not be getting any more accommodative.
We believe Japan to be an extremely poor environment for equity performance. The Japanese economy is predicted to grow at the slowest pace of all regions, in addition with a declining and ageing population, the prospect of future economic expansion looks unlikely. Thus, we expect poor equity performance from Japan.
Asia Pacific and Emerging Markets are predicted to see exceptionally strong GDP growth over the next year, but are struggling with the pandemic, particularly those countries who are not so able to distribute vaccinations to their populations. We remain concerned at the decreasing Chinese stimulus, together with regulatory crackdowns, investments in China require careful monitoring. However, the recent selloff in Chinese markets looks overdone given the longer-term outlook for the economy, and we remain positive on the emerging markets growth story in the long-term, and thus are comfortable maintaining an overweight position.
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 9th November 2021, and are subject to change.
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