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12th August 2021
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Graham BentleyGraham Bentley

Avellemy commentary covering July 2021

Welcome to the post-pandemic world - in England at least.

On the 19th July the Government put phase 4 of lockdown into place. With 90% of the country's most vulnerable vaccinated, and modelling suggesting any subsequent surge in cases - particularly with schools out for the summer - would have a dramatically lower impact on hospital admissions and deaths, this was a key step in the return to 'normality'.

That said, the extreme contagiousness of the Delta variant weighed on sentiment, and the FTSE All Share index fell by over 2% on 'Freedom Day'. Businesses continued to experience supply problems, with HGV drivers in short supply as the 'pingdemic' forced over 700,000 people into isolation. June data showed that UK inflation rose to 2.5% year-on-year. However, investors who'd isolated themselves from the news at least, would have been satisfied with a 0.5% increase in the index by the end of July.

The UK is being seen by the rest of the world as a post-pandemic test case. Vaccination rates are lower elsewhere, and significantly so in some major economies eg Japan. Consequently, the spread of the Beta and Delta variants is of greater concern outside the UK. Our ability to return to normality, with supporting economic numbers and no undue pressure on the NHS, may prove to be a blueprint for other nations. One might expect our stock market to react very positively if that proves to be the case.

In the US, equities continued to ascend to test all-time highs, despite inflation rising for the fourth month in a row to almost 5.5%. This could be explained by the fact that more than 250 of the country's largest companies had reported half-year results in July and almost all had reported earnings beyond market expectations. Meanwhile 10-year Treasuries' yields continued to fall, to below 1.2%. Given such low yields, the fact that global bonds returned over 1% during the month of July alone illustrates starkly the relationship between bond yields and prices. Falling bond yields make the dividend yields on quality companies appear more attractive so it was no surprise to see global equities improve, but value companies' (where you'd expect their higher yields to be more attractive versus bonds) shares returned less that 1% while growth companies (who by definition prefer to reinvest profits rather than distribute them) rose by almost 3%, in particular in the US technology sector, although the continuing strength of sterling saw the sheen of overseas profits dulled somewhat for UK-based investors.

Yet again, size made a difference in equities closer to home, with UK and European smaller companies performing strongly, but this was not repeated in Japan nor the US. Emerging Markets were the worst affected as China's regulators clamped down on technology and private tutoring companies. A positive spin on this development is that it does appear an attempt to rebalance competition inequalities; however, re-emerging political tensions with Taiwan helped to put Chinese stocks in negative territory, with the market down over 7% during the month.

Economists are taught certain heuristics (rules of thumb to you and me). For example, when unemployment is relatively high, job vacancies will be comparatively low. High unemployment typically means bosses hold all the cards in wage negotiations, as there is consequently little upward pressure on inflation.

In the US, despite a record number of job vacancies being reported, the unemployment rate remains significantly higher than one would expect. Employers' difficulty in filling vacancies reached an all-time high earlier this year, while the number of people voluntarily quitting their jobs without another one to go to is at a similar all-time high. What is happening?

A University of Chicago survey found that 6% of workers would quit their job instantly if they were told to return to the office 5 days a week. On average, respondents expected to work from home on 10 days a month post-COVID, whereas employers typically expected to allow less than 5 days a month. Instead of wages being employees' top priority,  

It may be that COVID has made profound changes in our behaviours at the microeconomic level. A desire to work from home is going to last, and is giving employees a stronger incentive to play hard, ie they can afford to be choosy about how and where they work. If firms capitulate and raise wages to accommodate such demands, then they are more likely to raise prices. Where inflation expectations are higher, those employees will bid up wages accordingly, and so on. The macroeconomic effects of COVID may prove to be fundamental but take some time to be evidenced, so again the diversification of portfolios, and regular contact with your adviser remain as important as ever.

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