Your Monthly Market Commentary: June 2021
|Our discretionary fund managers, Albemarle Street Partners, keep us up-to-date with their latest thoughts regarding world markets. Here is what they had to say on the current situation:|
Long and Short Cycles:
Global equity markets have endured a list-less few weeks as investors have dealt with concerns surrounding inflation on the one hand and soothing messages from policymakers on the other. The back and forth of the inflation debate has ignored the progress in corporate earnings and economic data.
Before we discuss earnings, it is worth addressing the elephant in the room. We have repeatedly said that near-term higher inflation is transitory and that policymakers are correct in ignoring it. Our Chief Strategist, Clive Hale, has pointed out that wage growth is accelerating in the US despite higher-than-average unemployment. His observation is apt and the difference in our views comes down to the time horizons being discussed. While I am focused on the next 12-18 months, Clive is talking about the longer cycle of disinflationary forces receding.
The last three decades have seen an influx of low-cost labour entering the global economic system. China’s accession to the World Trade Organisation paved the way for a period of low inflation and faster growth that came to be known as the great moderation. While this period apotheosized the role of the central banker it was built on a once in lifetime shift in labour supply.
Falling inflation drove a fall in bond yields, increased asset prices and allowed a deluge of debt to accumulate. As global poverty fell, advanced economies saw growing income inequality. While we are living with the after-effects of a three-decade decline in median real wages, labour supply in most advanced economies has gone into reverse. This glacial shift in labour supply may mark a turn in long term disinflationary trends. We continue to monitor incoming data and are yet to be convinced of a sustained turn in inflation. We have reduced the duration of our bond holdings in the last six months, purely for cyclical reasons, and continue to see risks to bonds throughout 2021. As always, we will pay heed to the data and until that point, we continue to debate the long versus short cycle shifts in inflation.
US companies have reported 52% year-on-year earnings growth for the first quarter, the highest increase in earnings since 2010. We remain of the view that the global economy is early cycle, and we favour value markets and small caps.
Source: Bloomberg (02/11/2020 to 27/05/2021)
The chart above shows the 6-month performance of various regional equity markets. UK and European equities have done well as they have a higher exposure to value sectors. Resurgent concerns surrounding the virus in Asia and Japan has derailed these markets in recent months. We expect a global synchronized recovery to take hold in the second half of 2021 which should continue to drive all risk assets.
We are focused on enhancing our exposure to the recovery in corporate earnings and continue to seek out funds and direct equities (where appropriate) that can benefit. While the path of the virus remains a key unknown, the UK and the US have shown the world what can be achieved when the population is vaccinated quickly. Cautious optimism, a byword for the post-pandemic recovery, will give way to animal spirits as pent-up savings and corporate spending are unleashed in full.
Source: Bloomberg, 31/5/2021