Image by Louis Maniquet

October 2021

INVESTMENT MARKET UPDATE

It’s time for another look at the latest factors affecting the investment market across the globe. We hope, as ever, you find it useful and informative. Our thanks to our partners at 7iM for their help in pulling the content together.

We are around 18 months on from the start of the COVID-19 pandemic, and already investors are worrying about the next recession. We think those worries are misplaced. We believe that the next decade will be different from the last, and that we’ll see a stronger economic cycle. Individuals are ready to spend while governments are thinking about the future, and business confidence is surging as a result.

THE GENERAL OUTLOOK

We expect inflation will be higher in the next decade than the last. Wage growth is strong, globalisation is slowing, and central banks are actively targeting inflation increases. But that isn’t a bad thing. When talking about inflation, people often forget that the reason central banks have inflation targets, is because some inflation is good for growth.

There’s a lot of noise around supply chain issues at the moment, but supply chain disruptions are likely to be localised and temporary, solved by the normal mechanism of supply and demand – it might take months, but it won’t take years.

If inflation is picking up (even a little bit), it’s natural to ask about the impact of a potential interest rate hike. Predicting exactly when rate hikes will happen is challenging. At some point, central banks will have to begin a hiking cycle; it’s a question of when, not if. Still, that’s going to be some way off – a question of years, not months.

Image by Sam Erwin

A WORD ON CHINA

The recent interventions in China are a reminder of the types of extra risks which investors take when investing in emerging markets. In the long-term, this doesn’t change our view that investor allocations to China are only going to increase. We should remind ourselves of the timelines on which China operates, which are far longer than most Western parliamentary democracies. The long-term aim of President Xi is that by 2035, China should double its GDP from the $15 trillion level in 2020 and triple its GDP per capita to $30,000.

Image by Markus Spiske

PORTFOLIO POSITIONING

Many questions are being asked about the US tech sector, and we believe the NASDAQ should keep rising. But the real question is whether the NASDAQ can keep rising at a faster rate than the broader market? Once economic growth gets going, we think this will lead to investors starting to re-evaluate the relative attractiveness of large US tech companies. While it may be difficult to look beyond the current strong performance, it wasn’t that long ago that things were different. Between 2003 and the end of 2006, US equities underperformed non-US global stocks by 70%.

And in fixed income, we think investors should also allocate to higher yielding parts of the universe, and towards alternatives, where possible. As interest rates begin to grind upwards again, investing in the kinds of bonds which have a little more protection in the form of higher coupon payments, will be beneficial. Government bonds will still protect portfolios, but aren’t going to make much in the way of returns.

Image by Matthew Bennett

A FINAL WORD ON THE INCREASE IN PENSION AGE

With people tending to live longer and spending a larger proportion of their life in retirement than in the past, the UK State Pension age is regularly reviewed to ensure it remains both affordable and fair. As increases are planned to both the State Pension age and the minimum pension age for private pensions in the coming years, it’s worth knowing what these changes are to help with such things as pension scheme administration and communications, retirement planning and the ongoing review of income requirements during retirement.

From 6 October 2020, the State Pension age became 66 for men and women in the UK. A further increase to age 67 is due to take place between 2026 and 2028.

Please be assured that as part of our service, we will factor this into your planning. But, as always, if you would like to talk about this in more detail, please do not hesitate to contact your adviser.