Supply bottlenecks and rising prices don’t derail growth

Supply shortages, rising inflation, a UK fuel crisis and a Chinese property scandal – investors could be forgiven for feeling a bit edgy after recent events. But the world economy continues to grow and looks set to do so into next spring.

The global supply chain bottlenecks should start easing in 2022 – one positive sign being that container shipping rates recently fell for the first time in months. Demand for goods should stay stable and, with the UK government deploying the army to deliver fuel, authorities may step in when needed.

Meanwhile, the higher inflation figures have caused central banks to adopt a more cautious tone about the interest rate outlook. But they have stressed that any changes will be well sign-posted and come gradually, helping markets adjust in an orderly manner.

Path of economic growth unchanged

Coutts Head of Investment Strategy Sven Balzer said: “Without a doubt September was a tough month for markets. Both bond and equity prices came under pressure, illustrating the concerns caused by slowing growth and rising inflation. This was also reflected in another slight decrease of our Coutts Investor Sentiment Index.

“Supply, labour and energy shortages are among a number of factors feeding into higher inflation. Some of them are temporary, some are not. But the authorities are aware of all this and will not want their work supporting the economy to be undone.”

He added: “The world economy is still growing. The growth outlook is normalising, but it’s solid, especially in the US. So we still see a positive environment into the first half of 2022.”

The MSCI World Index of global equities returned -3.7% in September (local currency terms), while US 10-year Treasury bonds returned -1.1%.

Solid portfolio performance despite current challenges

Here at Coutts, our clients’ Balanced portfolios continue to outperform their benchmarks so far this year and remain broadly in line with peers, while Growth portfolios are ahead of benchmark and the competition. Defensive mandates are broadly flat.

The portfolio performance shown below is net, so has fees and charges deducted, while the benchmark performance is gross with no such deductions.

Cumulative returns calculated on sterling basis, including fees, charges and income to 30 September 2021. These data are based on composite performance, individual portfolio monthly returns are asset-weighted based on their respective asset values at the beginning of the month. Peer group returns provided by Asset Risk Consultants (ARC); end-September data represents ARC estimate. Benchmarks represent a static mix of equities and bonds in proportions relevant to each strategy. Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment. Sources: Coutts & Co, ARC. October 2021.
 

The volatility in September caused our measure of the wider market mood – the Coutts Investor Sentiment Index – to drop slightly from -0.05 to -0.2 over the month. This keeps it squarely in neutral territory for now, as investors keep a close eye on the supply chain situation and inflation. 

Our index brings together various key market measures looking at volatility and investor positioning. Readings over 1 show strong investor confidence, while those below -1 show anxiety.
 

Managing markets for clients

We continue to use the latest data and analysis to actively navigate evolving market conditions on our clients’ behalf.

For example, our Japanese stock holdings stood out in September, delivering strong returns against a backdrop of equity declines elsewhere. Investors responded positively to Prime Minister Yoshihide Suga's resignation.

We sold our Chinese equity fund earlier this year – a good move for our clients as the country’s stock market falls continued in September. A government crackdown on companies appearing to create monopolies, and a major debt crisis at property giant Evergrande, took their toll on an already-slowing economy.

With emerging markets falling, we took the opportunity to shift our exposure into a dedicated Asian consumer-focused fund, which we’d monitored for some time. Recent price changes provided an attractive entry point. This long-term trend capitalises on demographic shifts in Asia including the rising middle classes and growth in online sales.

Inflation rises – so when will interest rates?

Economists and investors have been alert to the pace of inflation recently and how it might encourage central banks to move interest rates.

The US Federal Reserve’s (Fed) most recent meeting prepared markets for the strong possibility that it would start reducing its asset purchase programme in November – but not necessarily hike rates.

UK inflation, meanwhile, was 3.1% in September, and the Bank of England (BoE) expects it to reach a little over 4% given the sharp increase in energy prices. That’s over double its 2% target. This fuels speculation of a rate rise, although the BoE kept the base rate at 0.1% at its September meeting.

Doing well by doing good

Our responsible investment approach recently passed a tough assessment from the Financial Reporting Council, and we successfully signed up to the revised UK Stewardship Code. The code underlines how companies should create long-term value for clients leading to “sustainable benefits to society, the environment and the economy”.

We also became one of the first investment houses in the UK to buy into the government’s green gilts. This involves investing in environmentally progressive projects such as zero-emission buses, energy-efficient housing and offshore wind initiatives.

Leslie Gent, Head of Responsible Investing at Coutts, said: “We work to provide sustainable, long-term returns for our investment clients. We can only achieve that in a world with a sustainable future.”
 

OUR LONG-TERM PERFORMANCE