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Investment Commentary – September 2021

2 minute read

With the holiday season at its peak in August, markets were subdued. Major equity indices only fluctuated by 2-3% during the month, ending slightly higher. As traders return to their desks (even virtually) volatility may increase over the coming month. Potential catalysts for a move are already present, with slowing global growth, tighter monetary policy, and inflation all areas of concern.

Chinese equities continued their period of underperformance in the month. Regulatory intervention across a number of industries has spooked both domestic and international investors. The Chinese authorities have been looking to address growing inequality and uneven growth by directly and indirectly addressing large companies in key sectors. The most prominent of these has been the technology sector, which makes up a large part of the equity market and are dominant in overseas listings. While it is unlikely that the government will want to overly impede their national champions, they have shown willingness to instruct companies to change their behaviour, which is likely to weigh on investor confidence for some time. This does not remove prospect of strong returns from Chinese equities, which are now relatively cheap and continue to have good growth prospects driven by increasing domestic consumption. However, there is now clearly an elevated risk from government intervention for which investors will demand a premium.

Elsewhere, inflation watchers were unsurprised by the 5.4% reading for July CPI in the US, which was consistent with expectations as well as the previous month’s figure. While some elements of the headline figure have begun to roll over, high contributions from second-hand cars and energy continued to have a heavy impact. Furthermore, supply chain disruptions and labour shortages were applying some upward pressure. In the UK the rate dropped back to 2%, down from 2.5% and below expectations of 2.3% as clothing reductions weighed on the figure. Nevertheless, inflation readings in the UK are expected to rise before peaking around the New Year at over 3%. The key over the coming months will be to what extent is the rising inflation entrenched in the labour market, and any central bank reaction to such a situation. Markets are already becoming accustomed to the potential of higher rates, but any increase in the expected pace of monetary tightening will lead to bond market volatility.