Global equity markets have been on the back foot so far this week as coronavirus infections and deaths in India continue to rise.
While it’s hard to express how upsetting all this is on a human level, from a financial market perspective, not only is India the fifth-largest economy in the world, but more importantly it accounts for around 17.5% of the world’s population.
As a consequence, on top of the potential for further coronavirus mutations, there is a risk that the world’s supply chains could be further disrupted – and as financial markets are currently obsessed with inflationary pressures, this is unfortunately playing into the hands of those commenters speculating that central banks (such as the US Fed, BoE, ECB and BoJ) will soon tighten monetary policy, as any supply chain disruption could result in higher prices.
Although we appreciate that the resurgence in India’s coronavirus cases is obviously a sobering reality check given the continuing decline we are seeing here in the UK, one cannot escape from the fact that global economic recovery is still gathering momentum.
Furthermore, with coronavirus cases declining in the US, UK and Europe, coupled with the wider availability of vaccinations and the warmer weather, we don’t believe that the current economic recovery is likely to be knocked off course.
Consequently, we don’t believe that clients need to be worried by this week’s equity market weakness: as we have previously stated, the path for equity markets is never smooth or easy and while we fully expect equity market volatility will remain elevated in the short-term, we don’t believe the current weakness is anything more sinister than fickle market participants being far too eager and far too simplistic in their assumptions that any potential supply chain disruptions will both cut short the economic recovery and lead to higher inflation and interest rates.
On the subject of inflation, yesterday’s UK CPI inflation reading showed inflation had risen to 0.7% in March from 0.4% in February, due to a big increase in fuel costs. As we have previously warned, a sharp rise in inflation in the coming months is a foregone conclusion as last year’s big oil price decline is replaced by this year’s higher oil price. However, as this increase is only transitory and it has not been caused by excess demand, it won’t have any impact on the longer-term inflation outlook. Consequently, we believe that the BoE will look past this year’s higher inflation readings – and as such, we still believe that higher interest rates remain many years away.
Investment Management Team