Inflation (CPI) in the UK rose to 2.5% in June 2021, partly due to price rises in food, second-hand cars, clothing, and eating out. Meanwhile, the US reported CPI at 5.4%, after seeing the largest 1-month increase since June 2008. Whether these rises are transitory or sustained long-term is one of our more frequently debated topics at present. Central banks say that inflation will be short-lived, but just a few months ago they said they were relaxed about higher inflation and so we should not be surprised to see them let it run at 3-4% for several months. However, the recent fall in bond yields (with 10-year Gilts falling from 0.9% to 0.65% over the last two months) reflects that the global economic recovery may slow as we go through the second half of the year. This is the dilemma for policy makers and provides the uncertainty for the path of inflation.
We believe inflation could remain higher for longer, mainly driven by supply shortages which will only be exacerbated by any delay to western economies fully re-opening. There could well come a point when markets become jittery about the pace of economic growth leading to yet higher inflation – i.e. stagflation. We may therefore see equities experience an overdue pause / correction over the next few months. Our bond holdings are doing well in this environment and we would see a further drop in yields, and a correction in equity prices, as another opportunity to rotate into our preferred equity sectors and companies.
Emerging markets, and the Far East in particular, remain one of our preferred regions for generating long term returns for portfolios. Performance has been lacklustre recently, particularly among Chinese technology companies, and this warrants a few brief comments this month.
First, the US-China political relationship remains uneasy, but the Biden administration’s tone is less politically charged than the previous administration and the impact on the Chinese economy should be small. The tough tariffs on Chinese imports remain in place, despite clear evidence that they have been costly for American consumers and have not put pressure on the Chinese government, and so we await developments.
Second, there have been significant regulatory changes in China which has worried investors. The political tensions with the US may be leading the Chinese government to take steps to reduce the connectivity between the two economies, for example we may see Chinese companies listed in the US being encouraged to switch to exchanges in the Far East. There is also growing regulation around data security and privacy, along with greater protection for consumer and small businesses. Finally, there is growing regulation around private companies but these businesses are the engine of China’s growth and job creation, and so the impact should be manageable. All of these regulatory changes can create short-term volatility in markets but are likely to be positive for the long-term health of China’s economy.
Third, while the Chinese consumer has yet to recover fully from the effects of a virus pandemic, its manufacturing has fully recovered. The virus remains largely under control but it is the periodic virus outbreaks, and subsequent sharp localised lockdowns, which have left consumers wary of venturing out to spend; this should gradually improve as the number of vaccinated rises.
Despite these various concerns, we remain optimistic on the region for longer term investors.
Important Information
This update is for information only and does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. The views and opinions within this document are those of Casterbridge Wealth at time of writing and may change without notice. They should not be viewed as indicating any guarantee of return from an investment managed by Casterbridge Wealth nor as advice of any nature. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
