Global Market Overview – November 2021
Towards the end of November, it has been impossible to avoid endless headlines about the Omicron variant. Investors took the news very negatively and markets sold off. As 2020 demonstrated, markets (and the press) tend to overreact to Covid-19, and the most recent sell off is likely to be just that, an overreaction; so we’re not too worried.
Almost every scientific and medical authority is saying that it’s too early to draw conclusions about whether this variant is going to cause a significant problem. Within a few weeks, we should know more about the variant – and how effective existing vaccines are in protecting against it. Compared to this time last year, our communal immune systems are in a far more robust state – we know infinitely more about the disease and how to deal with it.
Despite this, scare stories have crept in as a number of countries have taken preventative action. We view this as broadly a pragmatic, stitch-in-time-saves-nine approach. Limiting flights and increasing testing is sensible, and improves the data collection. Avoiding lockdowns is still the priority of most Western governments.
In other news, Joe Biden has chosen to renominate J Powell as Chair of the Federal Reserve over Lael Brainard. This suggests that Biden favours a slightly less dovish approach and is perhaps more willing to tackle inflation than previously thought. With his renomination, Powell says that he is retiring the word “transitory”, suggesting that actions may need to be taken to manage the potential persistence of higher inflation. Our view is still that inflation will not be a major obstacle for growth going forward – although will likely average at a higher level than the last decade.
After a monumental 16 years as chancellor of Germany, Angela Merkel’s successor has been chosen. The man to follow in her footsteps is Social Democrat, Olaf Sholz, who has made a promise to deliver the “biggest industrial modernisation of Germany in more than 100 years”. Despite this, his first big moves will be in tackling Covid, where he is promoting mandatory vaccines by February.
Core views
A new wave of economic growth… For the past decade or so, the virtuous circle of consumption and investment has just not been able to get going. The scars of the financial crisis were too deep – people bought less while governments reined in spending. As a result, companies kept putting off investing in longer-term projects.
The 2020 recession hit the reset button... People are willing to spend again, while governments have ditched austerity. And so, companies are starting to invest for the future. We are now at the start of a sustained period of growth, fueled by confidence and expansion across all sectors of the global economy.
And a little inflation won’t hurt… Economists tend to dislike thinking about the psychology of inflation, but in a lot of ways, someone’s inflation expectations are a good proxy for their confidence levels. With the right amount of price and wage growth, people are encouraged to make life decisions which are positive for the economy. We haven’t heard the word “Goldilocks” for some years now, but there really is an amount of inflation which is just right to keep things humming.
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
December 2021
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited