Global Market Overview – July 2021

 July was a reminder that there are still a lot of unsettled issues which the financial world is trying to price. Fears and freedom are increasing together. Different variants of COVID-19 are still very much a problem – especially for countries with low numbers of vaccinations. At the same time, lots of countries are still trying to open up, and return to a more normal form of social life.

With earnings for the second quarter of 2021 starting to be reported, the news on the corporate side is positive; 85% of US companies have exceeded expectations – which were already set reasonably high. The story is the same in the rest of the developed world. Perhaps the most interesting thing though, has been the messaging from the mega-cap tech names. Apple beat estimates, but CEO Tim Cook warned of tougher times ahead, while Amazon’s warning over lower future sales caused a 7% drop in the share price; that’s $120 billion dollars lost, if you’re counting.

The other financial headline was the sudden clampdown on certain industries in China. Or at least, the market acted as if this was sudden. In reality, it’s been clear for some time that the Chinese government isn’t too happy about some of the profits being made by some companies at the expense of the average Chinese citizen – Beijing very much reserves that privilege for itself.

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.

 

August 2021
With thanks to Seven Investment Management LLP for their views and market thoughts.
RiverPeak Wealth Limited

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