September Investment Summary
All good things come to an end. The seven-month winning streak for stocks was stopped abruptly in September as the S&P 500 fell just over 4% for the month and the Nasdaq nearly 5%. In Europe, the FTSE 100 fell 0.5% whilst the Eurostoxx 50 was off over 3.5%. Asia fared better as the Nikkei 225 was up nearly 2% and the CSI300 (Shanghai Shenzen) rose just over 1.25%, but both closed well off their intra month highs.
The issues we highlighted last month namely: the Fed (tapering), the delta variant’s impact on activity (supply chain problems), China (Evergrande) and inflation combined to scare investors and some even suggested we were in or entering a period of stagflation. Energy prices and potential energy shortages (a spinoff of Covid related supply chain issues, coupled with weather related problems) also rose to prominence and spooked the markets. All of the aforementioned concerns remain, and these will continue to have economic impacts in the near term. But they are less threatening for the long run and do not suggest an impending recession or the advent of stagflation.
Let us touch on inflation, the Fed and other central bank’s tightening plans. August inflation figures did not provide any real evidence to suggest that the transitory inflation spike was coming to an end. In his recent testimony to the US Congress, Fed Chairman Powell admitted that inflation was staying higher for longer than they had anticipated. US headline CPI posted a 5.3% increase in August and the Fed’s preferred measure of inflation, the core PCE price index, rose 3.6% year-on-year and has now been over 3% for five consecutive months. For the previous ten years, it has never been consistently above 2%. German inflation figures rose to 4.1% for August and for the Eurozone it was 3.4%. Markets are beginning to get nervous that central banks may have to act sooner and more forcefully. Ten-year yields on US treasuries rose nearly 30 basis points at one point during the month. This may have weighed on equities. It was disturbing for balanced portfolios that fixed income provided little if any protection to equity price declines.
Well, is this it? Do risk assets continue lower from here? Is the best of 2021’s returns behind us? Tough questions. We do not think so, but this month and this quarter may prove to be more volatile than the first three quarters of the year were.
Firstly, China is going to continue to be a concern. The Chinese government has embarked (justifiably in our opinion) on a policy of reducing the economy’s reliance on debt and rampant credit growth. Home building has been a large part of Chinese growth over the last decade and it has certainly relied on reckless lending, and the belief that home prices only rise (where have we seen that before?). The challenge for the authorities is to reduce this growth without engineering a rapid house price fall and construction contraction that damages the broader economy. There is no easy way to manage this. The Chinese authorities can and will force the large state-owned banks to rollover existing debt (no matter how dubious) to prevent a full-on credit crisis. They will certainly take measures to stimulate other areas of the economy.
Do not be surprised if the Chinese currency begins to weaken, in an attempt to try and stimulate exports. However, whatever they do, short of giving up on slowing the housing and real estate markets they will not be able to fully offset the slowdown in activity that is occurring.
Secondly, energy price concerns are going to remain with us through the winter. A dangerous cocktail of reduced investment in energy extraction, weather related issues with renewable energy production and other Covid supply chain issues have created a shortage in natural gas that can’t be quickly replaced. Prices will likely go higher for oil and certainly natural gas. This will hurt activity and keep headline inflation high. Let us hope it is a mild winter in the northern hemisphere.
Winter is of course seasonal so the energy problem should naturally go away. China is not seasonal and events there need closely monitoring. If they do not take measures to stimulate other parts of the economy, we would become more cautious regarding the outlook for the country.
As we move into the final quarter of 2021, we believe that central banks will remain very friendly. The Fed reducing their purchases of longer-term securities will be measured and is, for the most part, factored in by the markets. No major central bank will be raising rates, certainly in the short-term. Labour markets remain tight, personal income and balance sheets are strong. Businesses need to rebuild inventories and boost capex. World economic growth will remain above trend, even as it slows from its pandemic re-opening highs. Stagflation is not on the horizon. We still favour equities and view near term weakness in prices this quarter as an opportunity to put cash to work.
Jeffrey Brummette
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.