After a fairly benign summer period, all of a sudden there feels a lot to cover in the weekly note. From gas shortages to Chinese property concerns to hawkish central banks, it’s all happened this week. Despite many of these headlines, equity markets have climbed the wall of worry in the middle of the week, quickly rebounding from the sell-off on Monday.
On domestic shores the UK gas crisis continued with further energy companies collapsing, meaning nearly two million homes have lost their supplier this year. The cost of gas for suppliers has spiked by more than 250% in 2021 and, unable to pass this increase straight through to customers, many firms have run into difficulties. While there are short-term drivers for the rise in gas prices, including unusually low wind speeds, a lack of investment in the gas industry has also caused structural problems. It’s an interesting case study and one we may witness again over the next decade with oil and commodity prices. We have been through a period of underinvestment in these sectors, for various reasons, and while the hope and target is to move away from fossil fuels, we have to question whether the infrastructure and technology are currently in place to do this. If not, we may find that our planet still relies on oil at a time when there has been little investment in the space, which is likely to lead to supply shortages and spikes in prices. For investors, this can create opportunities.
It was a busy week for central banks, with both the UK and the US deciding to keep interest rates at current levels. While this may sound fairly dull, the language and messaging used by central banks has impacted the bond markets. Both were fairly hawkish in their statements, showing concerns around inflation, which may lead to them increasing interest rates earlier than the market has priced in. Towards the end of the week, we saw government bond yields rise (and therefore prices fall). It may be worth noting that Norway increased their interest rates by 0.25% – the first G10 nation to do so – which acts as a reminder that ultra-low interest rates may begin to normalise over time.
Chinese equity investors have had a rough ride in 2021 as political and regulatory risk has come to the fore and dented many sectors. Despite China being the second-largest economy in the world, we have always been mindful of the weaker corporate governance and potential regulatory risk; this has held us back from having a dedicated China exposure in portfolios. Chinese property firm Evergrande appeared to miss interest payments on a portion of its bonds this week, stoking fears that a default is imminent. The company has a significant amount of debt and there are concerns that this could spill over to other sectors, such is the reach of the debt pile. This comes at a time when we have seen the Chinese government clampdown on the education, technology and healthcare sectors as China pursues a ‘common prosperity’ goal. While the fall in the Chinese stock market is of interest, it is very hard to know how deep or far this government intervention will go, and as such we are happy to allow our emerging market fund managers to use their expertise and be very selective with their allocations to China.
The issues facing global markets this week act as a timely reminder that risks can appear quickly and often without warning. Portfolio diversification is critical to help mitigate risk and smooth returns and we will continue to focus on this.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. 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 initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.