Market Update - October 2021
A greater sense of caution feels as though it’s been gradually creeping into the global investment community… and that's not a bad thing!
Long term bond yields continue to push higher, as inflation expectations also rise. There are “supply-side” issues everywhere and it's unclear at this stage, if heightened prices are transitory or permanent. Importantly, Central Banks will ultimately confine inflation to mostly a moderate rise.
Right now, some sectors are pushing their own boundaries. For example, makers of semi-conductors (components that run just about every electronic device you can imagine) are operating at full capacity, such is the demand for their product. Despite their best efforts, we’re told the global chip shortage will extend well into 2022 - adding further uncertainty to the uneven recovery we see across so many nations. Add in energy shortages, and the economic mood is more somber than the hopeful optimism we saw in the latter parts of 2020. Even so, plenty of demand remains “pent up”.
On top of our global Covid reality, there is tension building between two Super-powers over a small island in the South China Sea – Taiwan. To celebrate 100 years of the Communist Party, a Dao (Chinese sabre) now rattles. But to escalate frictions at this point would undermine China’s recovery - which relies so heavily on global trade. The US at least is playing a cautious hand, the Biden Administration on far better terms with Beijing than its predecessor. We think this unease will pass - China has more important things to focus on, after all - they’re still expert players at the long game.
September and October often are more troubled months for the world’s Financial Markets and this year is no different, with many values recently drifting back to levels seen in July/August. It is perhaps surprising that more ground has not been lost, as economies strain against tightening interest rates, escalating consumer and commodity prices, as well as much smaller “money printing” programs.
NZ’s Reserve Bank has again been the global leader, pushing ever so slightly higher the OCR (Official Cash Rate), dragging mortgage lending rates up and creating a small headwind to the speed of our economic expansion – that action ideally also causes some hesitancy in the minds of borrowers, as irrational house price inflation continues to defy the rules of reason. However, in this we are not alone, with overheated residential property values a reality for many OECD countries.
Maybe it’s all sustainable in a lower (for longer) interest rate environment but, an immediate question to answer down under is: How resilient will business investment and employment plans be - as the race between Delta and our vaccination targets play out in coming months? Things may well get worse before they get better, but they will get better as we learn to live with Covid-19. We’ve already seen the imposition of mandatory vaccination (a strategy for the stragglers), as we protect our health system for everything else that inevitably will arise.
Ideally soon, our boarders re-open. Bring on Summer, and some smaller restrictions, we can all live with.
Tony Munro | CFPCM, Post Grad Dip. Bus.Studies (PFP), FSP 5501
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client. A disclosure statement is available on request and free of charge.