November 2021

November Investment Summary

“The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner,” US Federal Reserve Chairman Powell said at his appearance before the US Senate Banking Committee on November 30. He also admitted that it was time to retire the use of the word transitory when referring to inflation. “It’s probably a good time to retire that word and explain more clearly what we mean,” he said.

Mr. Powell’s remarks combined with the discovery of the Omicron variant of Covid-19 was enough to cause a late month swoon in global equity markets. The appearance of the Omicron variant in Europe, right after its discovery in South Africa, produced sharp falls in European equity markets of between 2-4% for the month as lock downs were announced or contemplated by government authorities. Japanese equities also suffered nearly a 4% drop for the month, while the US and Chinese markets were roughly flat. We also saw sharp drops in many commodity prices, particularly oil and a fierce sell off in crypto assets as well.

Well, what do they (the Federal Reserve) mean? We suspect they are finally acknowledging what we are all experiencing: economies running hot on the back of massive fiscal stimulus and still exceptionally generous monetary policy that is producing higher inflation than we have seen in some time.

This generous monetary policy, via a combination of very low (even negative) interest rates and the massive asset purchase programmes of government debt has clearly been a driver of asset price inflation, but given these tools have been used by central banks for the best part of a decade, what else is driving inflation higher? Pandemic induced supply chain disruptions have clearly had an impact, whilst a shift in consumer spending habits with households favouring goods over services has also contributed to the rise. Energy related issues, as drawdowns of natural gas supplies from last summer have collided with an industry that has little spare capacity and is unable to meet the demands of world activity picking up all at once, has also been a major contributor. The rise in average hourly earnings, driven by an increase in labour demand as economic activity recovered, has also contributed to the spike in inflation. Taking all of the above into consideration, you start to envisage a scenario where inflation could be persistent for a longer period than first anticipated in early summer.

What will central banks do to manage this outcome? Our expectation is that they will be slow and cautious about removing monetary accommodation given the potential impact on asset prices. The Fed has already begun to reduce the size of their monthly asset purchases, which have been running at a staggering $120 billion per month during the pandemic. It appears they will end these purchases by late spring setting the stage for a few rate hikes. The Bank of England has suggested they will hike rates first and then end their asset purchases while the ECB has no plans to do anything just yet. China has begun to ease monetary policy as they are trying to manage their heavily levered housing industry, which is struggling. It would not be surprising to see the Fed funds rate in the US at 50 to 75 basis points by the end of next year and UK base rates at 1%. The ECB may even see rates as high as zero! None of these moves should halt the equity bull market or seriously impair growth. However, this shift away from super accommodative policy will unnerve markets as we have just experienced, so we would expect higher volatility ahead in financial markets.

We still favour equites but would recommend overweighting firms that make a profit and have pricing power. Companies with unusually high valuations that lack earnings are vulnerable to sharp re-ratings by the markets. Crypto assets are also vulnerable to sudden swings in sentiment. Looking at the NY FANG index and Bitcoin show a remarkable correlation, indicating that crypto is not quite the diversifier that investors would like to believe.

Jeffrey Brummette

Chief Investment Strategist

Disclaimer

This document was produced by Oakbridge for information purposes only and for the sole use of the recipient. Any information provided by a client ("Client Information") and used to produce this document will have been checked by Oakbridge for plausibility only and the client notified accordingly of any obvious anomalies. However, Oakbridge has not checked the Client Information in detail for completeness and accuracy and accepts no responsibility whatsoever in respect of the Client Information. The Client makes all investment decisions independently. Past performance, simulations and forecasts are not necessarily a reliable indication of future performance and the value of investments may fall as well as rise. The information contained in this document is only valid at the time this document is produced. A change in the economic environment, possible changes in the law and other events may cause future performance to deviate from that expressed or implied in this document. The information and analyses contained in this document have been gathered from sources that are generally considered to be reliable. However, Oakbridge makes no representation as to their accuracy or completeness in relation to the investment products described and does not accept liability for any direct or consequential losses arising from reliance on the information contained in this document. An Oakbridge Group company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the investment products referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. Alternative investments, derivatives or structured products are complex instruments that typically involve a high degree of risk, and are intended for sale only to investors who are capable of understanding and assuming the risks involved. Investments in emerging markets are speculative and significantly more volatile than investments in traditional markets. Some of the main risks are of a political, economic, currency or market-related nature. Furthermore, investments in foreign currencies are subject to exchange rate fluctuations. Investments in the investment products described in this document should be made only after carefully studying and reviewing the product documentation. The opportunities and risks associated with each investment product can be found in the relevant underlying securities prospectus and any other supplementary documents. All documents will be made available at any time upon request. Oakbridge does not provide tax or legal advice and, before entering into any transaction, investors should independently consider the financial risks as well as the legal, tax, credit and accounting consequences of that transaction. The attached material is not the result of our/a financial analysis. Neither this document nor any copy may be further distributed to any party. In particular, it may not be sent, taken into or distributed in the United States or given to any US person. This restriction applies equally to other jurisdictions, unless such actions are performed in compliance with the applicable laws of such jurisdiction. This communication is confidential and intended solely for the person to whom it is delivered. No part of this communication may be reproduced in any form or by any means or re-distributed without the prior written consent of Oakbridge. This communication should not be construed as an offer to sell any investment or service. This communication does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitat ion of an offer is unlawful. If you are in doubt about the securities to which this communication relates, you should consult an independent financial adviser. The information in this communication has been prepared in good faith, however, no representation or warranty, expressed or implied, is or will be made and no responsibility or liability is or will be accepted by Oakbridge or its officers, employees or agents in relation to the accuracy, completeness or fitness for any purpose of this communication. The information stated, opinions expressed and estimates given are subject to change without prior notice.

The services described are provided by Oakbridge or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Certain products and services may not be available in all locations or to all Oakbridge clients.

Oakbridge is regulated in Jersey by the Jersey Financial Services Commission for the conduct of Investment Business.

Oakbridge is a limited company with company number 121454, incorporated in Jersey on 7 June 2016. Its business address is Weighbridge House, 2nd Floor, Liberation Square, St. Helier, Jersey, JE2 3NA.

Oakbridge is a registered business name of Oakbridge Limited.

Oakbridge forms part of the ED Group.