Transitory Inflation or Not?
This week US Fed chair Jerome Powell added to market volatility by saying the term ‘transitory’ should be retired from the discussion about interest rates. Powell’s testimony to Congress also heard him support a faster taper of Fed bond buying. Markets duly reacted, sending equities down and US government bonds up. Powell said there is confusion as transitory can mean both very short term, and not permanent. Powell maintains he has always been referring to the later definition and still believes this is the case. Markets have been looking to the short-term and reacting when each month inflation refuses to fall. With expectation now growing that the Fed will act soon there is scope for further misunderstanding.
Meanwhile, the FTSE’s reputation for being stuffed full of old-fashioned businesses has been shaken as tech companies Darktrace, Wise and Deliveroo have all chosen to list in London this year. However, the transformation to a UK version of Nasdaq may have to wait as the initial performance of many of the new additions is proving underwhelming.
GLOBAL: OMICRON COVID VARIANT
Risk markets fell in November as concerns about the rapid spread of the new variant of Covid-19 caused a sell-off in global equities. The Omicron variant has been detected in most global regions despite the swift imposition of travel restrictions to limit its spread. There is still little information about whether the new variant is vaccine-resistant although early indicators from South Africa appear to suggest that the symptoms are less severe than other variants.
Equity markets have experienced a broad sell-off, with most major markets down substantially since 25th November. Oil has also dropped sharply, with Brent Crude falling from $81 to $71 a barrel over the last week. The uncertainty about the threat of the virus meant that markets have stabilised and many regions have staged a slight recovery in the first days of December. In the UK, travel and leisure stocks bore the brunt of the selling but healthcare, consumer discretionary and banks all fared poorly.
The general risk-off mood saw gilts and corporate bonds rally sharply to post positive returns for November, – which we are pleased to report we have been buying over the past 2 quarters albeit somewhat against market consensus over the period. This is the advantage we have as a small niche firm operating a fully open architecture, independent, flexible and nimble independent committee. As December gets underway, Peter Cousins, our new Chief Investment Officer has settled in exceptionally well as he begins his second full month with us. Already, within the wider wealth management business we are enjoying working together as a dedicated four-man investment team, – with Sebastian and Jamie continuing their excellent development as assistant investment managers & research analysts supporting myself and Peter as the lead managers. Over the past two quarters, with markets trading high, and with the backdrop of challenges that are with us, not least rising inflation, post-furlough period, tapering of government bond buying schemes and mooted interest rate rises, – we have reduced volatility (risk) across our client portfolios by between 30% and 50%. So we are in a very god position right now to cope with market volatility, – as the rebalancing of our clients portfolios continues to prove timely.
EU: INFLATION HITS RECORD 4.9%
We predicted in the summer that inflation in the eurozone would likely breach 5.0% by the end of 2021, and it rose to 4.9% in November, reaching its highest level in over 20 years. Rising energy prices remain the main driver but services and non-energy industrial goods are also contributing. The increase raised concerns that price pressures will persist for longer than previously anticipated, which puts more pressure on the European Central Bank to reduce its monetary stimulus. This was further heightened by German inflation hitting 6%, and as we have said many times previously, – high inflation is a very sensitive issue in German politics, such understandable sensitivity dating back to the hyper-inflation in the 1920s.
Meanwhile, the OECD released its biannual economic outlook. It left its global growth forecasts more or less unchanged, however, it raised concerns that the Omicron variant threatens to intensify supply shortages and put more upward pressure on inflation. Against this background oil prices, which have made a substantial contribution to inflation this year, have fallen more than 15% from their recent peak as increasing supply and the potential for more Covid disruption ease demand pressure.
UK: DARKTRACE RELEGATED FROM FTSE-100
Darktrace was one of the year’s better performing IPO’s when it listed in May. The IT security company achieved a valuation of £1.7bn and its shares had risen almost 200% by late September. It was added to the FTSE 100 in October, however, questions over its valuation and growth prospects have caused its shares to tumble. Many early stage investors took the first opportunity to sell when their lock in period ended and this has contributed to the slide which will see Darktrace exit the FTSE 100 later this month.
A number of high-profile listings have struggled to live up to expectations. Money transfer company Wise, tech company Alphawave and food delivery firm Deliveroo have all listed in the UK with billion pound valuations but Darktrace is the only one of the four to remain above its listing price. Other listings, including Oxford Nanopore and Trustpilot, are above their IPO value but the mixed performance of UK IPOs is consistent with the global picture as almost 50% of the 43 IPOs over $1bn in 2021 are now below their listing value.
If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week.
Yours sincerely,
