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12th November 2021

Graham BentleyGraham Bentley

It’s fair to say autumn is well and truly upon us. We Brits typically sniff at our American cousins' preference for the term "Fall", however that was in fact the English commoners' term for the third season until the end of the 17th century. Falls of a more dramatic nature are associated with October in investment legend:  1907, 1929 and 1987 are most notable although historically there have been more down movements in September.

Several global equity markets hit new all-time highs

Fortunately, October 2021 was not added to that series of collapses - indeed after a nervous start to the month, several global equity markets hit new all-time highs; The US S&P 500 rose almost 7% in dollar-terms, having hit 58 all-time highs this year alone and following some encouraging reports on companies' earnings in the third quarter. The UK's index of our 100 largest companies meanwhile gained a little over 2% yet remains some 9% adrift of its 2018 high. Asian markets remained subdued despite more encouraging news about Evergrande Group and other Chinese Property companies' ability to service their debt.

Inflation strategy high on global agendas

Inflation, and central banks' strategy for keeping it in check, remains high on global governments' agendas. The supply bottlenecks I've regularly outlined in this commentary have not eased. The port of Felixstowe, which handles over a third of UK imports and exports, has had to turn away container ships from Asia after running out of storage space, in part exacerbated by the shortage of HGV drivers. US inflation has reached almost 5.5% and ongoing shortages, especially semiconductors, imply their CPI rate may not peak for some time. EU inflation is at its highest since 2008, while in the UK petrol prices hit record levels, particularly in rural areas. Our own year-on-year consumer prices index is expected to top 5% in November. If that were not enough, Russia's Gazprom slashed production by 70% in a single day during the month, forcing European and UK gas prices to an all-time high.

Brexit friction and COVID cases dampen enthusiasm for rates increase

The standard approach to controlling inflation is to increase the cost of money, ie by increasing interest rates. However continued friction over Brexit - most recently fishing rights - accelerating COVID cases and those supply chain problems are dampening the Bank of England's enthusiasm for an early increase in rates. That is not the case elsewhere; many governments are taking the view that inflation is no longer a transitory phenomenon. Brazil raised its rate to 7.75%, and Canada flagged an intention to raise rates earlier than expected; the US has done likewise.

Odd outcomes in the euphoric post-COVID economic recovery

One might expect stock market sentiment to be rather subdued, if not outright negative against this backdrop. However, at the forefront of its thinking is the relief over post-COVID economic recovery. This euphoria has produced some rather odd outcomes: Tesla is now apparently worth $1.2 trillion, more than 20 times its revenue, let alone profits. That makes it worth more than the world's six leading car manufacturers (by cars produced) put together. The US market as a whole looks as expensive as it did before the dot com bubble burst in 2000. However, a note of caution here before fearing any market setbacks - interest rates are far lower (almost zero) than they were in 2000; the US rate was over 7% at its highest in 2000, versus 0.15% today. Low interest rates justify higher earnings multiples for shares because their dividend payments outstrip cash deposits' returns, despite the higher risk to capital. Investors therefore have a greater propensity to take risk when interest rates are low. This is why investors are refocused on central banks' interest rate policy, which in turn is driven by inflation expectations.

And finally 

Finally, we might be somewhat nervous about inflation in developed economies and deliberating over changes in inflation of half a percentage point here and there. We are nowhere near the inflation and interest rate levels we experienced in the UK in the mid-1970s, nor our rather desperate need for support from the International Monetary Fund (IMF). For those who remember those days, and other readers who are used to single digit rates, spare a thought for Venezuela. In October the US government vetoed an approach Venezuela made to the IMF for access to its COVID relief fund, citing the 'illegitimacy' of socialist Nicolas Maduro's presidency. The government certainly needs the money. Its reserves are tiny, and it currently has a year-on-year inflation rate of 1,473%. In a bid to simplify accounting, at the beginning of October the government cut six zeroes from its currency the Bolivar. Since 2008, it has removed fourteen noughts.

November and December are typically slower months for stock markets, particularly in the US where year-end portfolio rebalancing takes place as tax-losses are crystallised. Here's hoping for no falls worth writing about, that shelves start filling for Christmas, and looking forward to this year's John Lewis advert.

See you next month.


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