Brooks Wealth Management Market Update – October 2021

Whilst progress in fighting the pandemic varies from country to country, the vaccine rollout has provided much needed light at the end of the tunnel, with life in some places gradually returning to normal. Nevertheless, the rise of the Delta variant and rumours of further lockdowns later in the year remind us that the pandemic is far from over.

Throughout the pandemic, governments and central banks have worked together to pump money into economies in order to see them through the crisis. This experiment has staved off permanent economic damage, with growth this year having been stronger than expected in many parts of the world. Hence, on both sides of the Atlantic, there has been talk of tapering asset purchase programmes.

The Bank of England (BoE) has been talking of reducing its purchase programme, but at the last Monetary Policy Committee meeting voted 7-1 to hold it at the same level. Whilst tapering is clearly on the cards, interest rate rises are still pending, and central banks may have further reasons to be cautious. As the Delta variant continues to cause global concern whilst we recover from the pandemic, fiscal tightening (in particular tax rises) may restrict central banks’ ability to tighten monetary conditions. In the US, President Biden has been proposing tax rises to pay for infrastructure spending and, in the UK, the Government announced an increase in National Insurance to fund the NHS and social care.

In Europe, European Central Bank (ECB) President Christine Lagarde took a different stance, insisting that the “lady isn’t tapering.” In any case, the ECB has a flexible programme. The ECB has continuously raised its economic growth forecasts for this year, and as such, is reconsidering its monetary support.

In the US a number of Federal Reserve members increasingly voiced their support for reducing asset purchases before the end of the year as the US economy is now larger than it was pre-pandemic, representing a rather swift turnaround compared to recessions in recent decades. Tapering would involve buying fewer US Treasuries and Agency Mortgage-Backed Securities over time, rather than winding down the Fed’s balance sheet.

Equity markets as a whole, have delivered solid returns on the back of strong earnings, further supported by fiscal and monetary stimulus. Whilst the path to recovery from the pandemic may be facing further bumps along the road, central banks will factor in the potential fiscal support. Labour markets have seen a strong recovery, and the economic reopening has led to more spending. However, with furlough schemes ending, the easy gains for the economy may be coming to an end, and progress from here may be slower. If the Delta strain continues to put pressure across global supply chains and restrictions are reimposed, this could result in further constraints on the economy.

Recent issues in the cost and supply of Electricity and Gas have further put the spotlight on Environmental, Social and Governance investment opportunities (an area of specialism for us and our partners at LGT Vestra). This area of equity investment has been particularly strong throughout 2021 and we believe will continue to be so into the future.

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