September Monthly Note

Global Review

The UK economy grew by 4.8% in the second quarter of 2021 as Covid-19 restrictions were loosened, beating estimates. The level of GDP still remains 4.4% below pre-pandemic levels at the end of 2019. This data obviously does not include any possible effects of “freedom day” on July 19, which should provide a further boost. UK exports to the EU continued to recover in June, six months into the new trading relationship. Compared with a year ago, all British trade flows recorded double-digit growth, with exports to the bloc rising 29%.

The European Union recently announced new travel curbs on the US amid a recent rise in covid cases, dealing a blow to the tourism industry. Restrictions on travel to and from the US had previously been lifted in June, and the reintroduction will mostly affect unvaccinated Americans. The US had roughly 600 new covid-19 cases per 100,000 towards the end of August, with the EU limit set at 75. The EU has now vaccinated 70% of adults, hitting the end-of-summer target the bloc set for itself in January.

In the US the Senate passed the landmark $1 trillion infrastructure bill in August, setting the stage for a contentious debate in the House of Representatives. The bill could provide the biggest investment in decades in America’s aging road, bridges, airports and waterways. The news unsurprisingly sent US stocks towards fresh records.

In its continuing crackdown on domestic companies, the Chinese government recently announced it will ban its internet platforms from behaviour deemed to harm market competition. Shares in Chinese internet and ecommerce groups JD.com, Alibaba and Tencent plummeted on the news, with China’s market regulator demanding “self-rectification” from dozens of internet companies. This comes as the Chinese government has unveiled a five-year plan outlining tighter regulation of much of its economy, with new rules to be introduced covering areas including national security, technology and monopolies.

A&J Outlook

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 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.

There is good value to be found in European equities, particularly given the recent pick-up in the EU’s vaccine programme, however Europe remains behind others in reopening the economy, thus we expect European equities to remain volatile, with the potential for strong earnings growth once restrictions are eased.

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.

General Information The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 7th September 2021, and are subject to change.

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