Provided by Mercer - CERS Investment Adviser
Equity markets sold off sharply at the end of November over elevated inflation, tapering concerns and news of the latest Covid-19 variant. Sentiment had already been gradually weakening due to a return of restrictions in some countries in continental Europe as well as concerns that persistently high inflation rates could accelerate monetary tightening. Markets remained highly volatile towards month end and moved in line with news flow on the variant, with the VIX volatility index rising significantly. Defensive equity sectors that benefit more from a restricted economy such as information technology outperformed more cyclical sectors such as energy, and growth therefore outperformed value by a large margin. This also led to the US outperforming global indices. Returns for emerging markets lagged as most large index constituents such as China and Russia saw negative returns due to the feared impact on export demand, should the new Covid-19 variant indeed trigger a global slowdown.
Inflation concerns prompted most major central banks in developed and emerging markets to maintain their rhetoric on monetary policy becoming less loose with central banks in New Zealand, South Korea, South Africa, Mexico and a number of other smaller emerging markets raising short dated rates. The nomination of Federal Reserve Chairman Powell for a second term removed some uncertainty over the trajectory of US monetary policy. Tapering was confirmed to go ahead as expected and markets are pricing in a number of increases in short dated rates. A speech to Congress by Powell late in the month was perceived to be hawkish which added to negative market sentiment. The Bank of England unexpectedly held off on increasing short dated rates in November but markets are pricing in a number of rate increases next year.
The bipartisan infrastructure bill was passed by the US Senate but the rest of the budget is still subject to negotiation while another debt ceiling looms in mid-December.
10-year yields ended the month moderately lower for the US and sharply lower for the UK and Europe, driven by markets going into risk-off mode late in the month. The US dollar strengthened over the month against most major developed and emerging market currencies. Currencies of commodity exporters such as South Africa, Mexico and Australia were hit especially hard.
There were a few geopolitical events during the month. A meeting between President Biden and President Xi did not lead to meaningful results while NATO countries raised concerns over renewed Russian military activity close to the border with Ukraine. A new German coalition government was announced and a similar coalition government in Sweden collapsed shortly after being formed. None of the events had a significant market impact.
Energy prices collapsed. Initially, the announcement by the US and a number of other countries about releasing strategic oil reserves led to a sharp one day decline in the oil price with an even sharper decline following the news of the latest Covid-19 variant. Other commodities also performed poorly on the back of global demand concerns. Gold declined slightly despite the solid performance of other safe haven asset classes at the end of November.
We are broadly positive on the economic outlook. Strong income growth coupled with healthy consumer balance sheets should support consumption. We are also seeing encouraging signs on the investment front, with businesses engaging in capital-intensive projects. Governments, unlike after the global financial crisis, are not planning to tighten their belts anytime soon, with government spending and investment set to remain elevated.
Against this backdrop, we believe that the global economy is well on track to recover to where it would have been had the virus never hit and perhaps even to exceed that level. Virus-related restrictions and energy price spikes might weaken growth for a couple of quarters, but we expect growth to recover after things normalize, returning economies to their original trajectories toward full recovery.
On the subject of inflation, this is partly caused by transitory factors; however, some of it is not, and by the time these factors fade, there may be other inflationary forces to deal with, principally, wage growth driven by tight labour markets. We are seeing plenty of signs that companies are struggling to hire and are raising or planning to raise compensation. Higher wages mean businesses need to increase their prices to protect their margins, which leads to consumers demanding higher pay in their jobs, creating a self-enforcing cycle of underlying price pressures. While we expect this environment to persist, we do not expect inflation to get out of control like it did in the 1980s.
Scheme Year to date performance is the period from 1 June 2021 to the most recent month shown.
1 Year performance is the cumulative performance of the last 12 months to the most recent month shown.
Multi Asset Fund performance assumes no lifestyling.
Performance shown is net of annual management charge.
The investment choices offered by the Trustee will be regularly reviewed and may be varied from time to time.
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