June Market Update: central banks successfully walk the tightrope
For financial professionals only
In a nutshell:
- Falling global COVID-19 cases and the re-opening of economies means a strong economic forecast. The World Bank upgraded its 2021 growth projections in June.
- The US Federal Reserve, the European Central Bank and the Bank of England held firm and voted to maintain the current low interest rates.
- Equities rallied off the back of bullish sentiment, with the US market hitting a new high during June, whilst bonds remained steady
- Markets were willing to look through short-term data and accept the narrative that inflation will be transitory.
What’s moving markets…
Following a higher-than-expected US inflation print of 5% for the 12 months to May, all eyes were on the Fed. In their June meeting the Federal Open Market Committee held firm, attributing the inflation reading to “transitory factors” as the economy re-opens from COVID-19 lockdowns. They also committed to the current pace of at least $120bn per month in asset purchases (for now) and kept the base rate at 0-0.25%.
However, what did change is their consensus view of how soon base rates will rise. In March they’d forecast rates wouldn’t rise until 2024, they now expect this to happen in 2023.
Across the pond
In the UK, the CPI rose to 2.1%, driven by rises in food, fuel and clothing prices. The Bank of England expects inflation to reach 2.5% later this year, but then fall back below the 2% target during 2022. Much like the Fed, the Monetary Policy Committee voted to keep the base rate unchanged. Similarly, in Europe, the European Central Bank maintained ultra-low interest rates and its bond-buying programme.
Global growth projections upgraded
Economic forecasts remain strong. The World Bank upgraded its global growth forecast for 2021 to 5.6%. That’s the fastest post-recession pace of growth in 80 years. However, growth is expected to be uneven, with a few major economies leading and emerging markets lagging due to less access to COVID-19 vaccines.
This generally bullish sentiment was reflected in equity markets, with all-time highs for the S&P 500 index during the month. Microsoft became the second company after Apple to reach a staggering market capitalisation of $2 trillion.
Bonds remained relatively stable, as markets looked through the short-term data and accepted the narrative of transitory inflation. At least for now, the Fed is successfully walking the tightrope between maintaining accommodative monetary policy to support employment, while also managing inflation risk and not spooking markets.
Asset class implications…
There were positive returns (in sterling terms) for all major regional equity markets. Growth outperformed value style stocks in general, as US bond yields fell marginally. Alternative energy stocks performed best over the month, although the traditional energy sector also performed well as oil prices rallied strongly.
The US led the pack through June, with Emerging Markets and Japan close behind. The UK was a laggard, however, giving back some of the recent outperformance. Perhaps a reflection of the relative attractiveness of the UK equity market, there’s been increasing private equity activity of late. The rejected $5.5bn for Morrisons supermarkets hit the headlines last month, following deals earlier this year including John Laing, Aggreko and Signature Aviation. Parmenion’s acquisition by Preservation Capital Partners also completed on 30 June, marking an exciting time for our business and the next phase of our growth.
The bricks and mortar property sector delivered a modest positive return over the month. Leading open-ended property funds have seen outflows stabilising during recent months. This enabled fund managers to maintain a high quality portfolio of assets. Rent collection is improving as the economy re-opens. However, the Aegon property fund closure was announced during the month, and questions will no doubt remain over the sector while the FCA consultation continues. Our view on the asset class remain unchanged and we continue to utilise its unique diversification characteristics.
Index-linked gilts ended the month marginally down. Conversely, there were positive returns for investors in conventional UK gilts, sterling corporate bonds and global bonds. Bond markets remain reasonably calm for now, but we expect to see increasing volatility over the coming months. This driven primarily by central banks’ attempts to communicate future plans for tapering their bond purchases and hiking interest rates. For this reason, we continue to support a flexible approach in Fixed Interest portfolios, staying overweight in Strategic Bonds. We see it as beneficial to be dynamic in duration positioning, as well as allocating between different regions and issuers in this environment.
Asset classes in numbers
|FTSE Actuaries UK Conventional Gilts All Stocks TR in GB||0.72||1.70||-5.67||-6.24||9.35|
|ICE BofA Global Broad Market Hedge GBP TR in GB||2.12||1.06||-4.64||-9.26||7.51|
|IA UK Direct Property TR in GB||0.73||1.71||2.03||1.55||-0.27|
|FTSE All Share TR in GB||0.16||5.60||11.09||21.45||6.28|
|FTSE USA TR in GB||5.62||8.50||13.43||26.51||59.49|
|FTSE World Europe ex UK GTR in GB||1.80||8.27||10.91||22.83||33.30|
|FTSE Japan TR in GB||2.63||-0.52||0.54||11.59||16.83|
|FTSE Asia Pacific ex Japan TR in GB||2.54||4.06||6.20||25.57||34.95|
|FTSE Emerging TR in GB||2.88||5.03||6.96||24.11||32.98|
Source: FE Analytics, GBP total return (%) to last month end
“The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”
Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.