Delta Infections Weighing on Growth Expectations
The selloff was prompted by a continued surge in the Delta variant with new infections rising consistently above 100,000 and 30,000 a day in the US and UK respectively. It would seem there has been a shift in investor narrative, from worries about inflation giving way to concerns of slowing growth.
Stimulus Reduction Timeline
The July minutes from the Federal Open Market Committee (FOMC) were released last week with talk of reducing stimulus, but already they seem more akin to observations from a rear-view mirror – At a Texas Tech University event, the Dallas Federal Reserve President, Robert Kaplan, said he’s open to adjusting his view that the Fed should start tapering its asset-purchase program sooner rather than later if the Delta variant persists and hurts economic progress.
Traders are eagerly awaiting the Jackson Hole Economic Symposium, Macroeconomic Policy in an Uneven Economy. Taking place virtually on Friday 27th August 2021, it may offer clues on the central bank’s timeline for tapering stimulus.
Equities In Different Markets
While risks to the economy are mounting, money managers in search of returns are still favouring equities, according to US stock-fund data collected by strategists from Bank of America Corp. It would seem the “buy the dip” strategy we’ve mentioned before has not been undermined for US equities. The same cannot be said for Chinese equities, where investors have seemingly had enough.
Up until the start of the week, flows into Chinese Tech ETFs had been high, even as the markets plummeted with dip buyers piling in, but that trend reversed this week and the likes of Alibaba and Tencent fell further – affecting our Asian and Emerging market funds. The combined effect of tightening talks and the increase in general volatility drove an upward move in the US dollar, cushioning the falls in our unhedged overseas equities and bond positions.
US Economy Impacts
There is a lot of uncertainty about the direction of travel of the US economy; Will growth falter? Will inflation persist? It must be a nightmare trying to set policy right now, particularly with the virus refusing to go away as expected. Whilst we set the asset allocation for the models – currently, broadly neutral – much of the inherent exposure is driven by the positioning of the managers our fund selection picks. I am comforted by the slight style overweight in favour of growth at the moment.
For what it’s worth, I am firmly in the camp of transitory inflation and slowing economic growth. In such conditions, good stock pickers (Baillie Gifford) who can find (typically) growth companies that can grow independently of economic activity, should outperform.
I have no doubt the main topic of conversation over the next few weekly reports will be about tapering of asset purchases by the Fed and the ramifications for bonds and equities. I think the Fed have been good in preparing investors for the near certainty this will happen before year end and I don’t think it will rattle the markets in the way it has done previously. Bond yields are more sensitive to interest rate expectations, and I don’t see any change of direction there for the foreseeable future.
Author: Tom McGrath.
Today’s financial market commentary is for the week commencing Monday 23rd August 2021.