Markets continue to be somewhat calm and range bound for the moment though with the latest US inflation data due tomorrow and the Federal Reserve meeting next week, there are upcoming catalysts to give financial assets some direction. The current calm in financial markets is not repeated in my own situation; I write to you surrounded by packing boxes – today is my last day of work before we move to a new house!
Starting with the Covid-19 pandemic, the news in terms of new cases globally continues to move in the right direction, with 3.11 million new cases reported in the week to 4th June, well down from the peak of 5.75 million at the end of April. India this week reported under 100,000 new daily cases for the first time in over two months. Closer to home, the case numbers in the UK continue to rise as the ‘Delta’ variant becomes the dominant strain of the virus. Health Secretary Matt Hancock said at the weekend that the Delta variant is 40% more transmissible than the ‘Alpha’ variant that was responsible for the wave of cases over the winter. Hancock told Parliament on Monday that there are 12,383 cases of the Delta variant in the UK of which 126 people are in hospital. Of these people, 83 were unvaccinated, 28 had one vaccine doses and 3 people had two vaccine doses. It seems clear that for those fully vaccinated, the risk of hospitalisation remains extremely low, with Hancock saying “we know that the vaccine is breaking links between infections, hospitalisations and deaths”. The UK has now seen 53.6% of adults vaccinated with two doses; elsewhere the vaccine numbers continue to improve as vaccine supply chain stresses ease.
In terms of the economic data, the headlines have been dominated by the latest PMI data and the monthly US employment report. The PMI data continued to suggest that surveyed companies in manufacturing and most notably services were becoming increasingly confident in the recovery. While the manufacturing data has been robust for some time, the services data has been held back by the ongoing Covid-19 related restrictions but we are now seeing PMI services data approaching or at record highs, suggesting that the economic recovery is becoming more broad based across the UK, US and Europe. The issues with supply chain disruptions continue however, with the stop/start nature of the global economy over the past 16 months continuing to see survey respondents noting shortages of electronics, plastics, metals, microchips and construction timber, along with transport delays. For those concerned about inflationary pressures, the ‘prices paid’ subcomponent of the survey are at record highs and the bottlenecks in the global economy were highlighted in the services and manufacturing surveys showing the largest order backlogs ever. The US employment report was strong but missed expectations, with 559,000 jobs created in May versus 650,000 expected. In the words of Cleveland Federal Reserve President Loretta Mester, the report was “solid” but still short of the “substantial further progress” that the US Federal Reserve has stated is needed before the Fed starts to consider changes to monetary policy. Elsewhere, we saw Australia report first quarter economic growth of 1.8% in the first quarter of 2021; with this growth the Australian economy is now larger than it was at end of 2019. Australia now joins an exclusive list of six countries whose economies are already larger than before the pandemic struck. Can you guess the others? Answers at the bottom of the text….
The OECD updated their global growth outlook, increasing their global growth forecast for 2021 to 5.8%, well above their previous forecast of 4.2%. With growth of 4.4% expected in 2022, the OECD expect much of the world economy to have surpassed the output levels seen before the pandemic at some point next year. For now, the OECD estimate the average economy is still 2.7% smaller than at the end of 2019. The OECD noted that the recovery is very uneven, with economies that are more reliant on tourism expected to suffer for longer. OECD Chief Economist Laurence Boone called for further fiscal stimulus, arguing that “as countries transition towards better prospects, it would be dangerous to believe that governments are already doing enough to propel growth to a higher and better path”. Boone said that the “focus should be on investment” and the biggest risk to their forecast is in the failure to ensure that vaccine supplies reach emerging and low income countries with “the global economic and social cost of maintaining closed borders dwarfs the costs of making vaccines, tests and health supplies more widely available”.
We continue with our positioning of being underweight in both equities and fixed income against our benchmarks. With fixed income offering little in terms of risk/reward not least with heightened inflation risks, and equities close to all time highs, we continue to believe a lot of good news is ‘priced in’. We continue to see some opportunities in the alternatives and absolute return space, as well as on a regional level, where we remain overweight the UK and Asia, and underweight the US, Japan and Europe.
And finally – the countries whose economies are bigger now than pre-pandemic are…. Australia, China, Chile, Lithuania, Romania and South Korea. Well done if you got all six