Towards the end of the last three months many of us were asking “What actually qualifies as a shortage?” and “At what point do we panic?”, with the answers being unknown to most of the population, queues instantly appeared at petrol stations and shortly after petrol and diesel became like gold dust.
As with most things of this nature, the impact of the fuel supply crisis in the short term was severe for many, however the issue was short lived and normality restored, at least for now. This fuel crisis has a reasonable similarity to investments, yes there’s up and downs, but if you sit tight and manage to get through it, normal service does resume eventually.
Looking Back – Quarter Three
Another three months have flown by since our last commentary, so it is time for us to take our usual look back on how global markets have fared during the last three months and consider some of the events and factors which have contributed to the relevant performances.
Further detail in relation to our investment commentary and performance data can be found here.
Following the solid gains seen in Quarter 2, the last quarter saw moderate returns across most developed markets. Whilst we saw reasonable growth in July and August, this was generally offset by market conditions in September. In contrast, the Emerging Markets and Asia Pacific markets recorded negative returns for the quarter, effectively cancelling out the growth seen in these sectors in the previous quarter.
Importantly, whilst performance varies across all markets to date for 2021, only the Asia Pacific market is recording a negative return to date.
The US saw the strongest returns over the period, although the picture looked even better in August with some strong growth. This however was drawn back by concerns over inflation and the Fed stating in September that tapering of quantitative easing (i.e. a slowdown in the pace of asset purchases) is likely to be announced in November.
The UK just lagged behind the US, however these returns were once again hampered as inflationary pressures continued to surpass expectations, whilst the Bank of England has suggested that interest rate increases may take place as soon as the end of the year.
The negative returns recorded in the Emerging Markets and Asia Pacific markets were largely driven by one common theme, China. As at 30 September 2021, China made up circa 34% of MSCI Emerging Markets and circa 22% of MSCI Asia Pacific (ex-Japan) indices, therefore China has a considerable influence over both indices.
The last quarter saw concerns over Evergrande, a large Chinese property developer, ability to service its debts, which triggered investor concerns over the knock-on impact this could have on possible defaults elsewhere within the region. Sentiment towards the country was also weakened by the regulatory crackdown affecting the technology and education sectors.
The highly competitive education industry in China was hit hard by news that tutoring companies for primary and middle school students can only be conducted on a “non-profit” basis, whilst these activities have been banned during the summer break, traditionally the industries busiest season. This has caused investors to fear this theme may be replicated across other industries. Finally, the technology sector felt the brunt of most of the regulatory changes including bans on children playing computer games for more than three hours per week.
Elsewhere in the Emerging Markets sector, Brazil was the weakest market in sector as above-target inflation continued to rise and the central bank responded with further interest rate hikes.
Additionally in Asia Pacific, Pakistan struggled as ongoing political upheaval in neighbouring Afghanistan weakened investor sentiment, with fears that unrest could spill over into Pakistan. Likewise, Hong Kong and South Korea struggled, with both markets falling as market jitters over China spilled out into the wider region.
Once again, we saw positive returns across the tilts adopted within our portfolios. As we know, Value and Small-Cap traditionally do well in recovery periods, and we saw these tilts outperform the market in September given the market conditions felt across the board already noted above.
Looking forward…
There are likely to be a couple of factors which impact on markets over the coming months.
As already noted, inflation has impacted on markets during the last three months, and any increases will continue to be an influence when we look to the future, whilst any hike in interest rates is going to impact on markets. Whilst these could potentially be detrimental to global markets, as individuals’ disposable income may be reduced thereby potentially impacting on businesses revenues and profits, these are conditions which Value stocks have historically rallied in. Should this materialise, it will highlight the diversification benefits of holding Value stocks within our portfolios.
As we approach the much-loved festive period, especially after the restrictions of 2020, some businesses are fearing there could be a potential shortage in the supply chain over the coming months. This could potentially impact on the profitability of some businesses and sectors over the coming months.
Finally, having made an effort to focus on other factors, there is no getting away from COVID-19. The evidence so far is showing that the vaccines are effective in preventing serious COVID-19 infections, and with increasing vaccine rates across the globe, the reopening of economies should continue over the remainder of 2021. Whilst winter setting in will be a test, the rollout of booster vaccination shots will hopefully prevent further lockdowns being introduced.
Whilst the coming months could be a bumpy ride, it is important to remember that we are focusing on short term conditions here. It is essential to remember that each of our Portfolios are designed to meet a range of investors’ needs, having different target weighting of equities and bonds, with the aim of delivering a range of risk and return outcomes over the long term to suit each investor.
Peter
