August Monthly Market Update with CIO Piers Bolger

August Monthly Market Update with CIO Piers Bolger

August Monthly Market Update with CIO Piers Bolger 150 150 Piers Bolger

It was another solid month for financial markets this August as equity markets moved higher while bond markets were generally flat.

Over the course of the month there were several key takeaways that drove performance that will continue to impact markets through the latter stages of 2021 into 2022.

ASX Reporting Season brings solid results but Delta caution

The Australian Reporting Season was in full swing and overall, this was a solid performance period. However, outlook statements remained cautious by many companies given the ongoing challenges associated with the Delta variant as well as supply chain and inflationary challenges facing many corporates.

Supply chain logistics are continuing to have an impact on raw materials, finished goods, profitability lines and overall cost pressures for many companies. These ongoing challenges, however, have the potential to impact EPS going forward.

Overall, we were comfortable with the results. We saw some strong earnings growth across many of the corporates in our portfolios, with the broader market up 2-2.5% over the month.

Regulatory Environment in China not the sole driver of Emerging Markets

The second key aspect that we saw through August was the ongoing commentary coming out of China relating to its regulatory pivot.

The term ‘common prosperity’ has now entered the vernacular as a common phrase, which we believe will result in some challenges for large corporates in China such as Tencent and Alibaba, as well as wealthy entrepreneurs, with a push in our view to reduce the buildup of excessive wealth being concentrated in only a few. We believe this democratization of the corporate environment will continue to play out for some time and have implications for financial markets.

More broadly, emerging markets had a solid rally up over 3% over the month, which highlights that there is more to emerging markets than just China, despite its dominant position within the Asian region.

Quantitative Easing Programs starting to taper

Over the last couple of years, in particular post the GFC, QE programs have become very prevalent and a core means of providing ongoing liquidity to financial markets.  However, with an improving economic outlook the US Federal Reserve announced they would begin their tapering program to the back end of this year.  We view this approach as sensible as it affords the Fed greater levels of flexibility regarding when they may start to look to increase official cash rates.

In our view there remains a clear nexus between QE tapering programs reducing their bond purchase programs and providing support to financial markets relative to where they see their official cash rates.  To this extent, we expect official cash rates to remain on hold for a significant period as the Fed (and other central banks such as the RBA) look to taper their QE programs.

Pressure, pressure… Central Banks have something to think about

However, inflationary pressures continue to build, and we believe it will be higher through the cycle given the current macro backdrop.  Accordingly, in our view, bond markets look very expensive at current levels compared to other parts of the financial market.

In the context of supply chains, the chart shows the semiconductor index versus US PCE core inflation. The personal inflation index and price increase in semiconductors basically moves higher in tandem, highlighting the impact of higher cost pressures come through on the inflationary front.

The Asset with The Golden Gun

Given this inflationary backdrop we believe this will have broader implications for financial markets, particularly bond markets with yields expected to rise through the latter stages of 2021 into 2022.  In addition, this may impact numerous other asset classes including the more interest rate sensitive assets and (high) growth asset classes.

It’s clear that if inflationary pressures remain elevated and higher than what central banks are anticipating that may have implications for both equities and bonds throughout the cycle. However, if bond yields move up in a more moderate fashion (unlike what we saw through the month of February), which is what we believe central banks are trying to achieve, we don’t think that will derail the growth outlook or restrict equities and other growth assets moving higher.

Piers Bolger is Chief Investment Officer at Viridian Advisory.

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