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September saw the retreat of global equities after seven months of consecutive rises. Should this be a cause for concern? Investors’ risk appetite seems to have dwindled within the space of a few weeks for a number of reasons.
On the monetary policy front, the Fed is considering the gradual extinction of its accommodative measures, having gingerly prepared the markets for this eventuality. It is likely to reduce its asset purchases in the first instance, before subsequently adjusting the level of intervention rates. The European Central Bank is following in its footsteps, albeit with different semantics. The talk is now of “recalibrating” its exceptional measures related to COVID-19. Central bank purchases are about to dry up and markets have clearly got the message, pushing up long rates in recent weeks.
Inflation, characterised by central banks as temporary for (too?) many months, is proving more long-lived than initially expected. The boom caused by reopening has certainly provoked multiple shortages, pushed up raw material procurement prices, and in some instances caused dramatic delays in the supply chain. But the duration and extent of these price rises is starting to have secondary effects. Inflation is lasting long enough to change the behaviour of economic agents. Companies are no longer absorbing the full impact of price rises with temporary margin compression and this is starting to have a knock-on effect on their customers. Meanwhile, consumers are gradually seeing an impact on their purchasing power, as prices rise across a broad array of goods and services in the household basket. This phenomenon is resulting in wage negotiations in a labour market that is returning to normal and where some sectors are suffering from imbalances as a hangover from the COVID-19 era.
After the boom of reopening, economic activity is gradually normalising. This was to be expected, but its deceleration was not. Economists and supranational organisations have been downgrading their growth forecasts for 2021 and 2022 for several weeks now. This is yet another grain of sand in the works for investors, further stifling their risk appetite.
Nor is the political and geopolitical situation benign, with three phenomena coming to a head. Firstly, the end of the healthcare crisis is making national consensus harder to find. Secondly, geopolitical tensions seem to be strengthening, particularly between the two main superpowers: the US and China. And lastly, governments are increasingly intervening in business affairs, guided by the common denominator of reducing social and economic inequality.
For all that, the engine hasn’t seized up completely, as there are still a few well-oiled cogs. The healthcare risk is waning, particularly in countries where there is broad vaccine coverage. And despite double-digit rises in stock markets, corporate valuations have returned to more attractive levels thanks to far superior earnings growth.
The stock market machinery is not running quite so smoothly, but is far from stalled. The euphoria of reopening looks to be well and truly behind us. But is that for the better or for the worse?
Written on 1 October 2021, By Clément Inbona, Fund Manager, LFDE