The Week in Markets – 4th December to 10th December

News from the UK dominated headlines this week, with Prime Minister Boris Johnson taking up column inches on a daily basis, covering suspected Christmas parties, the birth of another child and further restrictions placed on the country.

The apparent Christmas party scandal from 2020, which has only made its way to the public’s attention over the last week appears to have seriously dented the credibility of the Prime Minister and looks like a genuine threat to his position. This week saw Allegra Stratton, former Government adviser, resign following a leaked video. By Friday, the director of communications, Jack Doyle, was in the crosshairs, with rumours of his participation in the alleged Christmas party putting his job at risk. All in all, the incident(s) have done little for the stability of the Conservative Party and could potentially leave investors nervous about their UK allocations given the current fragility.

Alongside this scandal, the PM announced further restrictions on the country, given the growing concerns about the transmissibility of the Omicron variant. Despite the increase in restrictions, markets were robust, perhaps looking through the likely short-term nature of the measures. Indeed, the UK large cap equity index has risen around 2.5% this week, despite the challenges highlighted above. There was positive news for UK homeowners with Halifax house price data showing prices had increased at the fastest pace for 15 years over the past three months. Over three months to the end of November house prices had risen 3.4% and were 8.2% higher than 12 months ago. A robust housing market typically spills over into increasing consumer confidence and consumer spending, which benefits the real economy.  A busy week for the UK was wrapped up on Friday with weaker than expected industrial and manufacturing production, which grew less than economists predicted.

When COVID-19 first emerged in 2020 it had a profound impact on the oil price, which fell significantly during the first few months of the year. However, the oil price is set for its best week since August with rises of around 7% over the last seven days. This is despite the rise of Omicron and the increase in restrictions that governments are placing on society. Sentiment has been buoyed by early indications that the severity of Omicron may be weaker than the Delta variant, while the longevity of measures, as this stage, is expected to be short. Investors are also mindful that OPEC+ will cut supply should Omicron concerns heighten.

A weekly round-up wouldn’t be complete without reference to inflation and the big news was saved for Friday afternoon; US inflation data came in at 6.8% year-on-year, a 39-year high. Breaking down the figures showed prices were rising across the board, including gas, food, new and used cars and housing (rents). The news will likely cement views that the US will raise interest rates in 2022 to attempt to keep inflation contained.

At a portfolio level, inflation can be tricky; high inflation is usually bad for traditional bonds, while it can negatively impact valuations of certain equity styles. We have tried to include assets in the portfolios that could, in theory, benefit, or at least not be worse off in inflationary times. Assets such as infrastructure, a physical asset, whose income streams are often inflation-linked, can perform well, while other real assets such as gold can be a store of value – both assets are held within our portfolios. While inflation seems to be in the spotlight now, we are aware of deflationary pressures that still exist, such as technology and demographics and factor this into our portfolio construction process as well, as always attempting to balance and mitigate risks.

Andy Triggs | Head of Investments, Raymond James, Barbican