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06 July 2021

Global Investors Expect Goldilocks Situation

Last week saw a generally positive sentiment in markets, as some of the initial fears of inflation’s impact abated. With core equity markets now hitting global highs, investors seem to be placing their bets on a Goldilocks scenario. “Not too hot” and “Not too cold”, the recent rise in US consumer prices are being seen as merely a transitory fall out from an exceptional run in economic growth. While understandable, given the base effects of a global economic lockdown, it could be argued these expectations are somewhat complacent; the reliance on Central Banks remaining accommodative to markets by continuing to support asset prices with their purchase programs.

In fact, the most recent Bank of America Global Fund Manager Survey found that most investors are positioned for bullish growth, transitory inflation, and a peaceful tapering program from the US Federal Reserve (Fed). The findings suggest a very positive outlook for global markets, but this has been coupled with a shift in sectors that are in vogue. Where only a matter of weeks ago the market was experiencing record highs in the ‘pandemic winners’ (Technology and Healthcare), sentiment is now showing managers preferring a mix of cyclical stocks such as commodities, energy, industrial and financial companies. These will certainly be the winners in a higher-growth, higher-inflation environment.

The Goldilocks situation may have some challenges on the horizon after last week’s OPEC meeting hit a roadblock in talks to release more barrels of oil into the market. The cartel of the largest exporting oil countries often finds itself at the forefront of oil price and inflation moves. Brent Crude, the key international oil benchmark saw significant gains on Thursday as the UAE put the stoppers on Russia and Saudi Arabia’s plans to increase supply. At the time of writing, Brent Crude sits around US$75 per barrel, its highest level in almost three years.

In the same report mentioned above, Fund Managers were asked for their views on Bitcoin, with a whopping 85% believing the world’s largest (and most talked about) crypto currency was a bubble. Despite a heavy retrenchment in its value during the second quarter, these polls imply a general shunning of the asset from Wall Street. Surely this won’t be news to the digital asset’s top advocates, who are less than interested in institutionalised participation in their revolution to decentralise finance. Widely considered as a digital proxy for Gold, proponents believe that holding the coin will allow them to by-pass the eroding effects that inflation has on traditional centralised currency, and rather, store that value.

Much like Bitcoin, Gold has now suffered its worst month since 2016, falling 7% in the month of June. Much of the moves were triggered by the Fed’s willingness to tame inflation pressures by indicating rate rises in 2023. Much like Bitcoin, advocates of the shiny metal will tell you they are protecting themselves from a currency devaluation against the effects of inflation, though the Fed’s promises have given Dollar holders some hope to receive an inflation beating interest rate on their position.

In the UK, markets have now returned to their pre-COVID 19 highs. With interest rates remaining at record lows and many alluring valuations from the years of Brexit drag, the UK is being seen as an attractive way to play the inflation uptick. With its high proportion of cyclical industries, investors in the market are becoming more comfortable to the short-term profitability that such companies can provide, despite their lack of future growth prospects.

Recently, Wakefield-based games developer, Team17, announced an acquisition of TouchPress Inc. The company is home to the StoryToys; a publisher of educational entertainment (edutainment) apps for school-aged children. Team17 has been a true success story in the gaming industry, having seen its share price triple since listing on the UK stock market and this acquisition should only bolster its diverse range of product offerings to the market.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Global Investors Expect Goldilocks Situation
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