An investor survey which has just been published shows a marked shift in investor concerns over the last month. It suggests that worries over the virus have eased but have been superseded by sharply increased worries over inflation. We examine what this means for market prospects.
Let’s start with the virus
There certainly has been good news here. New cases continue to decline in the US despite a significant relaxation in restrictions – never mind the data on mobility, just look at the crowds who watched Phil Mickelson win the PGA golf tournament, such a contrast with the British Masters last week where crowds were absent. In Europe, strong restrictions remain in place, but lockdown easing has begun and, importantly, the vaccination programme has picked up. It seems clear that the developed world is on track to offer a vaccine to all the vulnerable groups by the end of the summer. This progress has shown up in a dramatic rise in the keenly watched Purchasing Managers’ Indices (PMIs), first in the US, then in the UK, and now in Europe too.
The emerging world is far behind in the vaccination programme, but even here the numbers of new cases have peaked, notably in India where the virus seemed out of control even a week or two ago.
Concerns over the Indian variant lessen
For the UK, the Indian variant was raising serious worries in government last week, with the SAGE advisory committee delivering modelling that suggested the NHS could be put under pressures even worse than the two previous peaks if the lockdown easing programme wasn’t halted in its tracks. It is now clear that that modelling was based on poor assumptions. The Indian variant did seem to be more infectious than the Kent variant that wreaked havoc over the winter, but that reflected the fact that it has been imported by people coming from India who were more likely to live in crowded housing with poor ventilation and multi-generational families. Not because the variant was inherently more infectious. In Bolton, the worst-affected area, two care homes suffered a serious outbreak of the disease, but the only fatality was someone who had refused the vaccine.
Economic boom set to continue in the UK
The data released over the weekend did show that a single dose of the AstraZeneca vaccine had a marked reduction in efficacy against the Indian variant but the UK is well on the way to second doses of this vaccine and the government is offering to reduce the 12-week gap between doses.
It is still early days and there will be a rise in new cases in the UK as restrictions are eased, but looking at all the evidence, the associated rise in hospitalisations should be modest. The economic boom that we have seen in the UK looks set to continue for a while yet.
A summer lull for virus worries
This stream of good news on the vaccine does look likely to continue for the world as a whole. Nonetheless, the markets are in danger of becoming a little complacent over the virus. In the US, vaccine hesitancy is widespread. It is the only country in the world where the roll out is limited by demand – and the number of jabs being delivered has fallen as a result. They may have vaccinated 85% of the over 65s, but that still leaves 15% unprotected – a sizable proportion; the number for the UK is 5%. The unvaccinated proportions are higher for younger people and are worryingly high in the US for a number of special groups. This means that the risk of the virus mutating further is increased. It is too early to compare the numbers for Europe, but the see-sawing response of governments to the vaccines might raise the hesitancy there too. That’s certainly what the survey data suggest.
All in all, we expect a lull in virus worries over the summer for Europe and the US but are worried about a re-emergence in the autumn and winter. We’ll all be getting a booster jab by then too.
But what about inflation worries?
We expect those worries to get worse before they get better, the opposite pattern of the likely news flow with the virus. Surging commodity prices, bottlenecks in supply chains, pressures in the hospitality sector struggling to find workers to meet all that pent-up demand. It going to be a tricky few weeks.
But there seems no reason to expect a permanent move higher in inflation rates. Bottleneck pressures are temporary. Commodity prices have probably peaked, and economies still have plenty of spare capacity, once labour markets sort themselves out.
Central banks will begin to taper their support
That’s not to say that central banks will continue to buy up bonds at the present scale. The Bank of Canada has already decided to taper its bond buying programme. The Bank of England is likely to be next, followed by the Fed later this year, and the European Central Bank in 2022. And interest rates will not stay close to zero forever. All this will put upward pressure on bond yields and provide a headwind for equities.
The bull market looks intact, for now
Despite this, as long as the economic news flow continues to be positive, I believe that risk assets will continue to outperform. Most markets have already done very well so far this year, so further progress could be moderate. If I’m right and the virus fights back in the autumn, things might change, but for now, the bull market looks intact to me.