- Global stock markets produced good returns for investors over the past three months, but were somewhat volatile.
- Covid-19 infection rates around the world began to increase once again with the onset of autumn.
- Inflation rates began to rise as high demand for goods and supply chain disruptions pushed up prices.
Throughout the past three months, investors have been focused on several themes: the economic recovery from the pandemic, the increase in Covid-19 cases and higher consumer prices. Most major economies saw a strong increase in business activity during this time, particularly in the US and UK, although Europe started to see a sharp slowdown in growth in October.
Stock markets delivered good returns over the past three months, with Japan, the US and UK leading the way. That said, there were some bumps along the way, particularly in Asia where a regulatory crackdown by the Chinese government and concerns about a heavily indebted property company took their toll on stock markets.
Economic update
The economic situation in the UK could be described as mixed over the past few months. While there were clear signs of a recovery and business activity continued to pick up, this was offset by falling retail sales in September, constrained supply chains and labour shortages. At the same time, gross domestic product (GDP), which measures the size and health of the economy, continued to be below pre-pandemic levels. The most recent monthly reading of GDP, in August, showed growth of 0.4%, which was 0.8% below the February 2020 level.
Of significant concern in the UK over recent months, and throughout the rest of the world, has been rising inflation. In August inflation was measured at 3% which fell back slightly to 2.9% in September. However, there are growing concerns that it could rise further in the coming months, as a result of high demand for goods and materials, and severe supply chain constraints around the world. The Bank of England hinted that interest rates may soon need to rise in order to keep inflation in check, although this is not expected to take place until 2022 at the earliest.
Europe continued to recover from the pandemic, with its vaccination rates catching up to the UK and business activity rising. Consumer confidence was strong and more people ventured out to shops and restaurants. However, the economy lost some momentum in October as a result of rising Covid-19 cases and supply bottlenecks. There was also the issue of inflation, which increased to a decade high of 3%. Despite this, the European Central Bank said it is unlikely to raise interest rates in response, given this might cause a slowdown in economic growth.
The US was broadly in the same position as many other developed economies over the quarter. Business activity continued to grow throughout the quarter and consumer confidence was high. However, it also faced the same supply chain disruptions, higher materials costs and rising inflation being experienced in other parts of the world.
During the quarter, US inflation reached 5.4% as the cost of food, rent, new cars, gasoline and other goods increased. The Federal Reserve, which is the US central bank, indicated that interest rate hikes may come sooner than expected and signalled that it will start pulling back on some of its stimulus measures in November.
Finally, stock markets in the Asia Pacific region and emerging markets countries saw some volatility during the past three months. Much of this was down to the situation in China, where the government continued its regulatory crackdown on companies in the technology, education and gaming sector. The regulatory changes focused on data privacy, national security and socio-economic considerations, and included measures such as stipulating how much time children can spend playing video games and forcing education companies to convert into non-profits.
More broadly, Asia Pacific and the emerging markets faced the same supply chain disruptions and Covid-19 pressures as the rest of the world. China’s factory sector began to slow down and faced electricity rationing, while Japan’s industrial output fell for two months in a row.
Market commentary
Stock markets were positive in the three months to the end of October, with Japan, the US and the UK being the top performers in local currency terms. While most major markets generated positive single-digit returns, this masks the volatility that took place during this time. Markets in Asia Pacific were particularly bumpy due to the Chinese government’s regulatory crackdown on technology, education and gaming companies, along with investor concerns about the potential default of China Evergrande, a major property company with significant levels of debt.
In bond markets, much of the focus over the past few months related to inflation and whether or not interest rates will go up. Several major central banks, such as the US Federal Reserve and Bank of England, hinted at higher interest rates in the near future, which usually causes government bond prices to fall. Income yields move in the opposite direction to prices, which means the lower the price of the bond, the higher the income yield (as a percentage of the price) becomes. The statements from the central banks caused bond prices to fall due to a lack of demand, but it also meant their income yields – a measure of the return investors receive for holding the bond – increased. While bonds have not performed well over the past three months, they play an important role in providing diversification in investment portfolios, acting as a cushion during times when stock markets become volatile.
