Global Market Overview – August 2021

August has been a quiet, but good, month for markets, and 2021 continues to be a bumper year. Although the delta variant put some question marks over our social lives, markets aren’t really worried about it. As we’ve said before, all-time highs shouldn’t usually be a cause for celebration as markets should go up. However, this year, the S&P has already hit 53 all-time highs. That’s more than any year since 1964. And it’s not just the US that has been doing well, the MSCI World index is up 16.2% this year. Almost everywhere (with the exception of China), things have been positive.

As explained in our “core views”, we think that strong growth will continue, which is what ultimately drives returns. The Covid recession hit the reset button. People and governments are willing to spend and confidence should continue to grow. However, in August, there has been some noise around “tapering”, and this noise will get louder before it gets quieter. So, (1) what is “tapering”, (2) should we be worried about it, and (3) what can we do to prepare ourselves for it?

  1. What is “tapering”?

A “taper” refers to the winding down of a central bank’s asset purchasing scheme, (also known as “quantitative easing”). After Covid hit, central banks started buying securities through asset purchasing schemes at a faster rate than ever before. This isn’t a normal state of affairs and can’t go on forever, so with markets looking in good shape, there will be pressure on central banks to slow down – to taper – their asset purchasing programmes.

  1. Should we be worried?

In short, not really. The last time tapering made headlines was in the 2013 Taper Tantrum. The Federal Reserve announced the slowing down of their asset purchasing programme, and markets were surprised, so certain assets sold-off quite aggressively. But part of the reason for that sell-off was the shock-factor. This time people are talking about tapering already, and the Fed are being clearer with their messaging than they were before. When the taper does come, it should be less of a surprise than it was in 2013, and hence markets shouldn’t react as badly.

  1. What can we do to prepare ourselves for it?

Diversify, diversify, diversify. There’s still a lot of uncertainty surrounding a taper. We don’t know exactly when the taper will come, how severe it will be, or even which asset classes will be most impacted. By having a well-diversified portfolio, you are prepared for every eventuality and you don’t have to second guess exactly what central banks will do next.

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 stuff 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.

 

September 2021

With thanks to Seven Investment Management LLP for their views and market thoughts.
RiverPeak Wealth Limited

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