Market Commentary – October 2021

The ‘no-wow’ budget

October saw the UK government’s autumn budget announcement amongst widespread criticism for its lack of wow factor. In Chancellor Rishi Sunak’s words, the focus is very much on the “post-COVID era”, so it was no surprise to see measures designed to relieve some of the pressures on retail, hospitality and leisure businesses, with extended discount periods on business rates, and investment allowances, but no whole-scale or far-reaching reforms.   

Unexpected drop in gilt sales

Of more interest to investors was the surprise announcement by the Debt Management Office (DMO) of its plan to reduce debt sales by £57.8bn in 2021/2022 as the UK economy continues its recovery. This is a reduction far greater than anticipated, resulting in government bonds recording their greatest one-day price rise since March 2020 when Britain first plunged into lockdown.

Acknowledgement of a potential increase in interest rates

In a change of outlook, we saw the central banks voice the possibility of a hike in interest rates, with Governor Andrew Bailey saying the Bank of England “will have to act” to address rising inflation, although there was no indication when this might be. Interest rates are still at their record low of 0.1% and although previously it was considered that inflation would have to hit 4% for these to change, inflation is now anticipated to rise above this, potentially to 6%, due to soaring energy prices.

Investors now expect rates to be increased either later this year or early 2022 to reduce inflation back to the Bank’s target of 2%, and in the meantime, short-term bonds sold off heavily in anticipation, although further comment by Bailey indicates the addressing of inflation in the medium, rather than the short term.

Consumers at the real heart of the recovery

An increase in interest rates, as we know, could risk choking the recovery before it has really begun in force, especially with the central government’s employment support being removed and a million employees still on furlough as the scheme ends. And with much of inflation being driven by supply bottlenecks, a hike in interest rates would do little to change this. 

Pressure is on policymakers to consider any changes in interest rates in the light of how those changes would affect consumers, since carefree consumer spending is really what’s needed to stabilise the recovery. Caution is the watchword here to balance a fragile economy. 

Covid factor still affects the recovery

Intrinsically tied to our economic recovery, is the Covid recovery and, as if we needed a reminder, infections have passed 50,000 for the first time since July, meaning the threat of lockdown could loom, pending the effectiveness of the booster jab programme. In Europe, infection rates are climbing, and several countries have introduced measures, for example, Russia, which has introduced a work-from-home mandate.

Rising gas prices push up coal and oil

A shortage of supply, low inventory levels and a big increase in global demand continue to drive the price of natural gas higher, pushing the price of oil past $80 for the first time since 2018. Coal also sees rapid price rises, with the price per ton soaring from $59 a ton to $212 a ton in the space of a year. China, scaling back domestic production in anticipation of less demand due to tougher emissions targets, along with supply bottlenecks and other countries bringing coal-fired power stations back online in the face of rising gas prices, are all contributing factors. 

Recovery plan amidst still rising inflation in the US

US inflation has remained above 5% for the fifth month straight, with rising food and housing costs making a significant contribution. And economic growth slowed significantly in the third quarter of 2021 due to a combination of supply-chain disruptions, a resurgence of coronavirus and reduced spending on consumer goods. 

The senate has now approved a deal to temporarily raise the debt ceiling to enable a small increase in allowable debt in order that the government continue to function until December. This temporary deal enables more to time for getting Biden’s huge infrastructure spending and social welfare reform passed. 

Supermarket shares affected by bidding war for Morrison’s

After 54 years as a public company, October saw the private equity bidding war for Wm Morrison’s come to an end with US firm Clayton, Dubilier and Rice, agreeing a price of £10bn for the UK’s fourth largest supermarket. The deal values the company at a 61% premium to the pre-bid share price and, although Morrison’s shares fell slightly following the announcement, the news helped boost the price of rivals Tesco and Sainsbury’s on Monday. 

Pharma companies forecast doubling of vaccine sales

The large pharmaceutical companies continue to develop their coronavirus vaccines and treatment with the result that French company Valneva reported very strong clinical trial results causing its shares to jump 39%. In addition to vaccines, Pfizer and Merck continue to develop their anti-viral pills to alleviate Covid symptoms, and even without any further innovation Pfizer and Moderna are forecasting their vaccine sales to double in 2020.

Chinese growth slows considerably 

Global trade disruption and a domestic energy crisis have impacted on production in China and have resulted in GDP figures revealing a slowdown of its annual growth. To the end of Q3, GDP was at 4.9%, down from 7.9% for the three months to the end of June this year.

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market-00.02%-00.02%-00.02% 00.00%
Gilts FTSE Gilts All Stocks 02.06%-02.43% 01.43%-04.31%
UK Corporate BondsUT UK Fixed Interest 03.42%-00.45% 06.36%-00.13%
UK EquityUT UK Equities 00.75% 01.25% 04.61% 40.77%
European EquitiesMSCI Europe ex UK 03.72% 01.96% 06.91% 32.18%
US EquitiesS&P 500 04.40% 06.28% 11.25% 32.85%
Japanese EquitiesMSCI Japan-02.96% 03.81% 03.35% 13.08%
Emerging Markets EquitiesMSCI Emerging Markets-00.26% 00.93%-03.91% 10.33%
PropertyUT Property 03.59% 02.12% 09.24% 27.14%

Data Sourced from FE Analytics, and Bloomberg Finance LP.

*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice