Market review – October 2021

September was a month which saw a number of different factors at play, all of which caused concerns to the investment markets. In no particular order those concerns included:

·        Rising inflation;

·        Stuttering economic growth;

·        More hawkish rhetoric from central banks;

·        Energy prices rapidly increasing; and

·        The ongoing speculation around the Chinese real estate company, Evergrande, which could be on the brink of collapse.

In the UK inflation continues to dominate the investment picture. Having fallen to 2% in July the consumer price index increased to 3.2% in August. A lot of the reasoning for this increase was explained by prices 12 months ago being significantly lower as part of the government’s Eat Out to Help Out scheme. As we will all be aware, gas prices have surged in recent weeks, which is only going to fuel (no pun intended!) inflationary pressures. The Bank of England (BoE) is still expecting a figure of around 4% by the end of the year, but still considers this to be a temporary issue.

Once again, mirroring comments made in the US, the BoE advised that there was no need for immediate action on the increasing inflationary figures. However, the recent prices have probably increased the likelihood of some tightening of monetary policy in the not too distant future. For instance, the BoE have not ruled out interest rates increases this year, and the markets are pricing in an increase as early as February next year.

Growth in the economy still falls way below its pre-pandemic levels. In July the UK economy expanded by 0.1%. The three months to July saw unemployment fall to 4.6% and average wages increase by 6.8% (excluding bonuses). During September the FTSE 100 was down 0.5%.

As with the UK, it appears that the US is edging towards tapering its programme of asset purchases, and this could begin as early as this year. The Federal Reserve (Fed), has pointed towards a strong jobs market, economic growth and temporary inflationary pressures. Like the UK, there is a feeling that interest rates could rise in 2022, when this wasn’t expected until 2023. However, the Fed have indicated this is all dependent on pandemic containment.

In August, the annualised rate of inflation fell slightly to 5.3% from 5.4% in the US. There was some moderation in economic growth prospects for this year, with an expected figure of 5.9% down from 7%. Although this was countered by an increase to 3.8% for 2022, from the previous figure of 3.3%. It is clear that policymakers on both sides of the Atlantic are looking to prepare markets for future tightening of policy measures. September saw the Dow Jones Industrial Average fall by 4.3%.

Following a similar theme, the European Central Bank (ECB) announced it would look to draw back on the Pandemic Emergency Purchase Programme (PEPP). However, they stated that this wouldn’t be until March 2022 at the earliest, which helped to reassure the financial markets. Maybe in a further effort to calm the markets, the ECB President referred to this as recalibrating not tapering.

Meanwhile in Germany, voters went to the polls to determine a successor for Angela Merkel after 16 years in power. As widely predicted, the results of the poll were a coalition government, for which an agreement will need to be reached. The Dax Index was 3.6% down in September.

There will also a change of leadership in Japan, where Prime Minister Yoshihide Suga plans to stand down and be replaced by Fumio Kishida. Second quarter growth in Japan was higher than originally calculated, increasing to 1.9%. The Nikkei 225 Index rose by 4.9% by the end of September.

Fingers crossed the supply issues currently being seen in the UK haven’t impacted on you too much. I did have some difficulties with finding petrol in my local area but thankfully this seems to be easing now.  As always, if you have any queries in regards to any aspect of your financial planning, please do get in touch (link) with myself or one of the team.