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July Comment: are we nearly there yet?

Updated: Sep 7, 2021

Over a year ago as the world moved into the isolation of the pandemic, we offered a simple thought for investors to remember. We wrote that the world would ultimately recover - however bleak it seemed. Humans have the ability to bounce back from almost anything and eventually the global economy would bounce back. We also warned that the stockmarket would recover long before the wider economy. Whilst in the real world it would feel like the darkest days, for the market there was only a need to be a dot of light at the very end of the tunnel for a recovery to be mounted.

This has proved true and indeed since the 18 February 2020 – the moment the world realised how bad this pandemic would be – UK shares have in fact posted a gain of some 1.17% for UK Investors and the US market has posted a gain of a whopping 22.15%.

We have worked to make sure that our investors were able to benefit from this recovery whilst always weighing the very real risk of a resurgence of the virus, a vaccine-resistant strain or an inflationary shock triggered by the massive government intervention that has been required to pull us out of recession.

As we write in July of 2021, for most of us the question we ask each day is ‘are we nearly there yet?’ It looks as if the restrictions on our daily life are close to being lifted. The evidence that vaccines are highly effective is incontrovertible for anyone who makes decisions based on data. Whilst it will no doubt take time for many of us to feel confident to return to our pre-pandemic life - we can at least do so if we choose.

The challenge for investors though is similar to that which it was in the early part of 2020. We have to ask whether, just as the real world exits the pandemic, the market may have already posted all the gains it is to post, pricing in the recovery before it is felt in the real world.

Perhaps in the real world we really are nearly at the end of the pandemic, in what the Economist called ‘the long goodbye.’ However, for markets perhaps the gains have already been made and the party is nearly over.

The fear of this was reinforced this month when the US Federal Reserve, which has been cheer-leading a market recovery with everything it has for months, for the first time struck a cautionary note. It warned that it would not allow inflation and growth to run wild but would ultimately need to tame the ferocious surges in both, which have been triggered by the end of the pandemic paired with massive government support.

We see the intervention of the Federal Reserve, which warned that in 2023 it may start to raise rates, as akin to a parent coming downstairs to warn partying teenagers that they will have to go to bed soon. Neither party really expects this to happen imminently, but the adult aims to get across the message that at some point the party must end – it cannot be an all-nighter.

The market took it much the same way. For a few days, the mood in the room dropped and those companies that have been exposed to the cyclical market recovery – value shares – began to struggle compared to safer quality growth companies. However, pretty soon the party re-started with all participants choosing to forget that an adult would emerge from the upstairs again at some point, it was just a matter of time.

The reason the market has not panicked about the Federal Reserve’s intervention is that whilst monetary support may begin to peter away, the actual companies in which we invest are still likely to see significantly expanding profits in the months ahead. It believes, as do we, that for some time this profit recovery will continue to enable shares to make further progress.

Yet despite this optimistic thought we should remember that the market recovery we have seen is already quite advanced. The economic recovery has happened at a terrifying pace. Our response is to begin to prepare your portfolios and our thinking for the next phase of this economic journey.

This phase will, we believe, include the dawning realisation that there are still some quite negative forces out there in the world. Whilst governments and central banks have created some inflation, the forces that have driven disinflation for a decade have not evaporated.

We believe that the investment process we deploy on your portfolio, which carefully blends different market factors based upon the wider economic conditions, is well placed to read the signals of a changing world and ensure that you remain on track to reach your financial goals.


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