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September Comment: Never been better, but you wouldn't know it

The summer months have been kind to the global economy with much of the world seeing a surge in activity. The delta variant continues to wreak havoc in unvaccinated populations but has so far failed to undo the progress made by vaccines. The UK government is yet to roll out a strategy for booster jabs and the vaccination of children. With schools reopening, a surge in cases seems likely.

The summer can be a strange time for equity markets, especially after a period of strong gains. Profit taking is cathartic, particularly for those of us with a nervous disposition. De-risking should not be confused with a shift in the economic cycle. Investor interests are best served through a detailed understanding of the profit growth and forward-looking macro indicators.

Corporate profits, the life blood of financial assets have exceeded analyst expectations by a considerable margin over the second quarter. This has occurred despite a surge in input costs and a delta related slowdown in certain industries. Companies around the world grew profits at the fastest rate since mid-2009 and the recovery in profits is expected to continue over the next 12 months. This creates the backdrop for higher dividends, buybacks, capital spending and employment. Household savings have surged during the pandemic. Forward looking indicators of consumer spending such as asset prices, employment growth and consumer confidence continue to improve. Many consumer sectors are struggling to find enough workers to meet surging demand. These momentary problems are the fortunate consequence of aggressive fiscal and monetary policy that kept the household and banking sector afloat and ensured the self-sustaining recovery post pandemic.

GDP across the world is rising sharply:

Naysayers will point to the removal of policy as an imminent danger to the recovery. History is littered with policy missteps but the last decade has shown us that economic growth is far lower than before the global financial crisis. This realisation alone changes the political, social and policy imperative. We believe that policy tightening will take far longer than investors envisage. Jerome Powell in his speech post Jackson Hole, toned down the possibility of rate increases while looking to taper bond buying by year end. Fiscal policy is likely to follow a similar path with proposed tax increases diluted and delayed as-long-as possible. These headwinds are real but matter less when profits are growing. As profit growth starts to slow, policy changes are likely to impact equity markets more severely. We will look to cross that bridge when we get there.

We expect risk assets to continue to do well, supported by easy policy and sharply higher corporate profitability. Pockets of volatility due to a resurgence in the virus are likely to be short lived and are unlikely to derail a self-sustaining economic recovery.


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