Federal Reserve

Investment Commentary – July 2021

2 minute read

Markets edged higher in June, with sentiment continuing to be supported by economies opening up. Vaccine programmes in many developed countries have now reached a critical mass and the bulk of vulnerable people are now immunised. While there have been concerns over the spread of the Delta variant that caused such issues in India, these have not been sufficient to derail the reopening.

The concerns that were growing in some areas of the market of the threat of runaway inflation were addressed by the Federal Reserve during June. The latest Federal Open Market Committee meeting minutes showed that members were expecting to increase interest rates earlier than previously anticipated. While this did create some an initial rotation in equities out of “value” stocks and back into “growth” as well as a selloff in government bonds, Federal Reserve officials were quick to reaffirm their support for the extraordinarily loose monetary support currently in place. The net result should now provide comfort for both extremes, that the outlook is likely to be more balanced. If the economy were to overheat and inflation was a problem then the Federal Reserve has indicated that it will act, however, until then, the support will remain.

As the pandemic and government action have a lessening impact on economies and markets, investors may need to be more discerning. The rising tide that has supported all stocks may also be hiding longer term issues. This is already being seen within those stocks that are considered “recovery” investments. Typically, these are companies that were most significantly hit from the effects of the pandemic and government restrictions and are likely to have the most to gain. However, there are already stark differences with some companies that were in this camp now back to normality, such as manufacturers, while others are still facing significant uncertainty, most clearly, travel companies. Furthermore, the strength of these companies may be more permanently impacted by the last year, such as accruing burdensome debts that will limit future investment and ultimately, growth. With significant share price gains already seen in these recovery stocks, more care may be needed going forward to ensure that the long-term losers are avoided.

Globally, there is also a growing split between countries and regions. While the deployment of vaccines in Western developed markets has allowed restriction easing, many emerging markets may need to wait many months, if not years to reach the same level of immunisation. Furthermore, emerging markets in aggregate have benefitted from a combination of strong developed market demand for manufactured goods, as well as a strong rebound from China during 2020. Both of these factors are likely to ease over the coming quarters as spending is diverted to domestic services and Chinese growth eases to a more normalised level. Nevertheless, while there may be a delay in reaching normality across all countries, the question is when rather than if.