If I had written this round-up yesterday my opening paragraph would have referenced a relatively benign week in markets, with minimal volatility in asset class prices. Fast forward to this morning and we can now delete that opening sentence.
News broke yesterday evening of a new potential variant of COVID-19, which potentially is immune to prior infection and vaccinations. The epicentre for this new variant appears to be South Africa and governments are already ‘red listing’ countries that appear to have cases. It is still very early in the assessment of the mutated strain, with the World Health Organisation (WHO) meeting today to examine it further. On Friday morning it was clear that equity markets would not wait for more data and there was a severe sell-off across global bourses, with markets such as the UK opening down around 3%. Stocks expected to struggle more in a potential lockdown bore the brunt of the sharp falls with British Airways falling around 10% and cinema operator Cineworld off 5%.
The beneficiaries of the short-term risk-off environment were traditional defensive assets, such as government bonds and gold. While these asset classes have struggled for much of 2021, they rallied strongly on Friday morning with the gold price up over 1% and government bond yields steeply falling (and therefore prices rising). It’s moments like this that remind us of the need for diversification in portfolios. In isolation, we, as an investment committee, are not particularly positive on the outlook for developed market government bonds as a stand-alone asset class, but we do value their diversification properties and their ability to perform in times of equity market stress. Today is a timely reminder of that.
Oil markets have been in the news this week with US President Biden aiming to lower the price of black gold, which has been on the rise this year. His failed attempts to get OPEC to pump more oil have led the US to release 50 million barrels from their reserves onto the market. This level of reserve release is unprecedented and nearly twice as large as any previous US inventory release. Despite the extra supply hitting the market, oil prices actually rose at the start of the week. Biden’s wish for lower prices did appear to be granted on Friday morning however with COVID-19 induced fears driving the price down by around 6%.
Economic data was mixed this week with strong manufacturing data in the US and UK offset by slightly weaker durable goods orders in the US. The strong manufacturing data did fuel inflation and growth expectations and we witnessed US government bond yields rise during the start of the week to reflect this.
Next week ushers in the start of December, a month that is typically positive for equity markets, known by many as the “Santa rally”. The backdrop for this seemed set, until this new potential variant emerged.
Our investment approach and portfolio construction aim to ensure that there is a diverse blend of assets held in portfolios, some of which act as a type of portfolio insurance on difficult days like today. Our long-term investment time horizon also allows us to potentially look at days like today with a level of optimism, as there could be short-term mispricing which creates opportunities for long-term investors.
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.