The improving economic outlook has manifested in the oil price as demand is likely to increase sharply as further restrictions are lifted. Over a longer-term view, the price is still at low levels and there is, therefore, the scope for further increases. However, there is significant spare capacity, particularly for OPEC members who will likely be keen to increase production as soon as possible to restores revenue. Any further price rises in the shorter term may therefore be limited as this spare capacity is brought back online.
Conversely, the gold price has weakened as the demand for safe havens has declined. However, this is likely to be a shorter-term liquidity-driven move as there continues to be significant support for higher prices, which have arguably strengthened. As the prospect of higher inflation has increased yet interest rates are expected to remain low, negative real yields have widened. This is the primary driver of the gold price and should lead to support in the medium term regardless of the safe-haven value.
Property has recovered with the broader equity market as improvement in the economic outlook and the prospect of a quicker return to normality improved the prospects of physical assets. There are still doubts over the viability of some areas of the markets, particularly retail.
The bulk of our alternatives continue to deliver robust performance. The JPM Global Macro Opportunities and First Sentier Global Listed Infrastructure that makes up the majority of our alternatives exposure both delivered positive absolute returns in the quarter. Infrastructure, in particular, benefitted from improvements in the economic outlook and wider equity market. We continue to believe that in the longer-term infrastructure will look increasingly attractive to investors looking for a long duration, inflation-protected income.
The hold positioning that we reduced but retained in July and October suggested over the quarter but has been showing signs of life during December.
Central banks have done little more in the way of monetary policy changes over the last quarter, although policy remains very loose across the board. On average, the expectation of further cuts or quantitative easing has decreased in anticipation of more robust economic growth next year. However, guidance from central banks and market expectations are firmly for no increases in rates for some time. The rise of a new, more infectious variant of COVID in the UK means that there may well be additional QE support, especially if government support is broadened once more.
In the UK the Bank of England has expanded its quantitative easing by an additional £150bn in November, coinciding with the second national lockdown and announcements of further government support. This takes the total QE outstanding to almost £1tn. There has been speculation around the potential for negative rates however, The bank has made great efforts to communicate that they were only attempting to make sure that the tool was available not that they were about to use it.
The ECB has likewise extended QE and extended the timelines of how long this will be implemented and maintained. Monetary policy in the Eurozone is already so loose that it is difficult to perceive how this will make a tangible difference to the real economy.
Overall, although monetary conditions remain very loose in the short term, probabilities of even lower rates and more QE have decreased creating arguably tighter conditions. However, in reality, central banks remain incredibly supportive and will undoubtedly step in with further support if necessary.