Provided by Mercer - CERS Investment Adviser
Global equities moved higher in June, with US equities outperforming non-US equities. During the month, we saw a continuation of the global economic rebound, along with supply chain constraints and inflationary pressures. Reopenings across the developed world have allowed the service sector to catch up with goods and forward looking activity indicators suggest that the recovery is still far from having run its course. Pressure on supply chains increased as the spread of Covid-19 disrupted transport and manufacturing, especially in countries where the vaccination roll-out is lagging behind. Inflation readings surprised on the upside. This prompted the Federal Reserve to send a more hawkish message, which initially spooked markets, although the month ended with positive equity returns and lower yields.
GDP readings indicate an ongoing strong global recovery and purchasing manager indices are still at multi decade highs for most parts of the developed world. Supply chains remain constrained and some cyclical commodity markets are running hot as a consequence of pent-up demand, which could pose risks to the global recovery. Semiconductors are still the sector where shortages are felt most and this is spilling over into car manufacturing and tech devices.
Inflation has reached decade highs in some regions, which is also partly due to the base effect that is still being felt, more in some regions than in others. The Federal Reserve sent what markets perceived to be its most hawkish message since the Covid-19 crisis began. It announced the first scale back of its Covid related programs and suggested potential further tapering later in the year. Its dot plot brought forward the first expected rate increase to 2023. However, subsequent communications reassured markets again that there are no plans to pre-emptively raise interest rates at this point as inflation is still seen as transitory and downside risks to the recovery remain.
Geopolitical events this month included US sanctions on Russia, a brief UK-Russia naval encounter in the Black Sea and a major UK-EU dispute over the new regulatory border between Great Britain and Northern Ireland. Western media and politicians revisited the Chinese lab accident theory as possible origin of Covid-19 pandemic, which China once again dismissed.
The events of June did not escape the attention of financial markets. Volatility increased for both bonds and equities mid-month after the Federal Reserve meeting. Equities recovered subsequently after Chairman Powell toned down the perceived hawkishness and ended the month on a positive note, led by growth stocks. Bond yields fell after an initial spike and ended the month at lower levels with a flatter yield curve, which some investors saw as a sign of markets downplaying the prospects of a more aggressive Fed reaction function, especially as inflation expectations also receded.
Commodity markets had a mixed month. Energy performed well amid the prospect of the ongoing strong demand recovery, but other commodities such as copper and lumber saw their momentum reverse. Lumber supply is finally catching up with demand, and China released industrial metal stockpiles to the market in order to halt the spike in some commodity prices. Gold had a bad month after sentiment shifted back towards risk-on.
Our medium term macro outlook remains positive. In combination with natural immunity acquired in the latest COVID-19 waves, a large part of the developed world is expected to achieve herd immunity by early summer. Even if the majority of emerging markets are far behind the curve with vaccinations, China and most other Asian nations have been able to effectively manage the disease without wide scale vaccinations and only limited restrictions. Full re-openings are expected to unleash a mini boom in the summer as pent-up demand is released and savings are spent. Even if households do not draw down all their accumulated savings, the mere return of the high saving rate to its long- term mean would be highly stimulatory in itself. Monetary and fiscal policy is set to remain accommodative and policy-makers remain committed to step in to keep economies afloat and markets stable in case of temporary setbacks. This continues to limit the downside for risk assets and justifies further compression of the risk premia. The latest $1.9 trillion stimulus package in the US has added fuel to the fire. Even beyond immediate stimulus, fiscal policy is set to remain expansive. The proposed US infrastructure package of close to $3 trillion would lead to a boom in government investment. It could mark the onset of a ‘high pressure’ economy with governments spending aggressively to generate high rates of economic growth.
For companies, this means strong earnings growth from a low basis in an early cycle environment this year which is most beneficial for equities. At the same time, the unusual constellation of lose monetary policy and strong economic growth has increased inflation expectations and put pressure on bond yields. This creates an adverse environment for duration assets.
- 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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