Market Review July 2021

Global stock markets typically rose during June, albeit major Asian markets underperformed. During the month, the rotation in stock markets from growth to value saw something of a reversal - back in favour of growth.

Market Review July 2021
Ermin Fosse

Ermin Fosse


Fever Pitch

  • Spread of Delta variant across Asia and parts of Europe
  • Delta variant forces UK to delay exit from lockdown until 19th July
  • New Health Secretary, Sajid Javid warning of 100,000 of new Covid cases a day
  • Double vaccination appears to break chain of infection and hospitalisation with delta variant
  • World Bank raises global economic growth forecast to 5.6% for 2021
  • UK manufacturing PMI indicator hits highest reading on record in June
  • Eurozone PMI business activity indicator climbs to 15-year high
  • US services sector PMI indicator hits an all-time high
  • Bank of England says CPI inflation expected to go above 3% for temporary period
  • ECB says rising inflation in Eurozone is temporary
  • Two members of US Fed suggest period of higher inflation may last longer than anticipated
  • US Fed ‘dot plot’ signals two interest rate hikes possible before the end of 2023 leading to a flattening of the US yield curve
  • US and Asian equities outperform in June boosted by US Dollar strength

Stock markets appeared more comfortable with the major central bank’s view that the current uptick in inflation is transitory. In turn, Government bond yields continued to fall, hitting lows last seen in March. Only time will tell if this is a brief respite or the emergence of a longer trend.

Rising global instances of the Covid Delta variant has also cast a bit of a shadow. Doubts over the relaxation of Covid-19 restrictions have hurt companies considered to be ‘reopening plays’, another possible driver of the rotation in stock markets. However, as the UK has shown, the vaccinations appear to have broken the link between the rate of infection and the rate of deaths, with the latter considerably lower than during the previous wave of infection. At the time of writing, the expectation is that having delayed, the UK will fully reopen on July 19th.

The sentiment swing in favour of growth stocks unsurprisingly meant a return to favour for the technology sector, driving the S&P 500 to fresh all-time highs. In the UK, the delay to reopening tempered sentiment, likely also weighing on Sterling, which ended the month down some 3% against the US Dollar.

Whilst stock markets have experienced bouts of volatility around inflation expectations, bond markets have continued to be much more accepting of the message from central bankers that inflationary pressures are transitory. Nevertheless, it seems likely that the coming months will see this thesis tested with inflation expected to continue to rise. The BoE has latterly flagged CPI could hit 4%, before receding.

The inflation picture remains uncertain, muddied by the exit from lockdown with the release of pent-up demand and global supply chain issues, such as in semi-conductor chips. Some of the global supply chain issues should diminish in 2022, as new capacity comes on stream. In addition, whilst a number of commodities have retreated from their May highs, oil has not, rising another 8% over the month. However, the main challenge could be wage inflation, as certain sectors continue to struggle with recruitment.

For those parts of the world at earlier stages of vaccination, the outlook remains quite uncertain. This may, in part, explain some of the underperformance of some Asian markets, the other being the concern over tightening in China, as well as the latter’s relations with the West as the country celebrates a century of communism.

In summary, we continue to expect further progress from stock markets in the second half of the year. With economic activity likely to remain very strong, boosted by the outlook for consumer demand and capex, and in turn, supporting the outlook for corporate earnings. In this scenario, and supported by appealing valuations, the UK continues to look well placed when compared to other global markets. Whilst we remain mindful of the Federal Reserve becoming slightly more hawkish in acknowledging that it has now started to talk about tapering, this is to be expected as economies recover.

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