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When should we expect the all-clear?

Is the UK’s recovery on track?

10 June 2021

Our Chief Investment Officer talks about the latest market movements, future inflation expectations, and what to expect from the second half of the year.

The current landscape

Stocks recovered from their initial swoon at the beginning of May. Energy and financials have been the standout sectors year to date. Meanwhile, the superstars of last year continue to dwell at the bottom of the pack with information technology delivering much more muted returns than other previously out-of-favour sectors. Elsewhere, diversified commodities have continued their impressive start to the year, excluding gold. Within fixed income, there has been something of a bounce back in high-quality corporate and government debt.

Meanwhile, investors are still desperately trying to predict the future trend in inflation beyond the pandemic-related distortions we're seeing right now. We are only likely to get a better sense of what our working, playing, and investing lives settle back to when this pandemic is in a meaningful, global retreat.

More broadly, incoming survey data is indicating that the global economy is very much in motion. The US ISM surveys are evidencing very elevated levels of activity. This chimes with other comparable surveys and trade data from important hubs such as Korea which point to a brisk global recovery in progress.

What is important is how the US, Europe, and the UK have dealt with the crisis in their respective labour markets. In the US, the crisis was allowed to flow freely through the labour market, as policymakers accepted a significant rise in unemployment in the first stages of the crisis. In Europe and the UK however, policymakers tried to preserve the labour market through furlough and other comparable schemes.

The rest of the year ahead looks busy with the disbursement of the hard-won European Recovery Fund. Italy and Spain are likely to receive a significant portion of the fund while sizeable amounts are likely to be spent on energy transition and digital transformation. Meanwhile, in the US, there are growing expectations that the Democrats are going to do as much as they can with regards to the infrastructure spending package, through so-called ‘legislative reconciliation’.

In terms of coronavirus (COVID-19), we are seeing a significant degree of resilience now being built up in the developed world. However, the crucial point here is how quickly the world can reach a herd immunity level. Only then will we really be able to start thinking about the all-clear from this crisis. And until then it's going to be a complicated journey.

As ever, we recommend investors get invested, stay invested and stay diversified.

Hello and welcome to this June episode of Monthly Market Insights.

I'm Phil Attreed, Barclays Head of Investment Consulting, and I'm joined again this month by Will Hobbs, our Chief Investment Officer, as we explore what's been going on in the world of investing.

Will, let's maybe start with global markets: what are the key highlights for the past month?

Yes, hi Phil, another month gone by.

Stocks recovered from their initial swoon at the beginning of May; it was a very minor swoon.

And if you look year-to-date, Energy and Financials are still the standout sectors and a very impressive performance so far this year from stocks overall.

The superstars of last year are very much at the bottom of pack and in sector terms again, so you're seeing Information Technology and so on with much more muted returns than those previously out-of-favour sectors.

Diversified commodities have continued their very impressive start to the year, excluding gold, right across the piece, so Energy, Industrial Metals, Agriculture, all that very strong.

And within fixed income in the last month, you've seen a little bit of a bounce back in some of the high-quality corners, so high-quality corporate and government debt.

But year to date, it's still quite a soft story for those higher quality corners.

Quite - and so what exactly have been some of the most influential bits of new news, if there is “new” news, that's out there that have been driving some of those market movements year to date?

I mean, from my point of view, from what I've been reading, it still seems to be that inflation is very much at the front and centre of a lot of the market moves that we've seen in the last month.

Yes, I think that's right, Phil.

Investors are still desperately trying to peak over the horizon to see what the trend in inflation looks like beyond the jumble of noise on bottlenecks and various other distortions, pandemic-related distortions we're seeing right now.

As we’ve said before, we'll only start to get a better sense, a better view of this once we get a bit more of a look at what our working, playing, investing lives settle back to when this pandemic is in meaningful, global retreat.

And I think that global point is really important.

So we've changed, we just don't quite know how much.

And until we know that we're only then going to see the nature and number of jobs that the global economy is going to offer society and that will give us a better idea of the trend of inflation after that.

More broadly though, incoming survey data is telling us that the global economy is very much in motion; the US ISM Surveys, which you know we set a bit of store by, they're speaking of very elevated levels of activity still, persistently right up at highs.

And this chimes with other comparable surveys and indeed actually trade data from really important hubs like Korea, that's all speaking the same story, which is of that brisk global recovery in motion.

And you alluded there to the outlook for the jobs market.

We've obviously had some data coming through last week.

We're seeing maybe quite a complicated picture, particularly in the US, a slower expected recovery from some of those extreme highs of unemployment, obviously through last year and what were clearly very difficult times for the economy.

But does that maybe also tell us a little bit more about what we can expect in Europe as well as we start to see lockdowns on unfold?

Yes, it's a good moment as usual for the dogs to go nuts in the background, sorry: the pandemic noises, along with “you're on mute” … so yes, it’s a good question, Phil, with regards to the labour market.

I think you and I have spoken about this quite a lot over the last year and I think the important context here is the very different way that the US, Europe, and UK have dealt with this crisis, with regards to the labour market.

So obviously there are similarities in terms of the degree of muscularity of that response and how rapid it was relative to crises response past.

But in terms of the labour market, there were very different ways that they've been dealing with it.

In the US, the crises were allowed to flow pretty freely through the labour market in many ways.

Policymakers accepted a huge rise in unemployment, really an eye-watering rise in unemployment in the first stages of the crisis.

That was one of the … that jobless claims chart right at the beginning, was one of the really amazing charts you could see in terms of explaining just how incredible this crisis was.

And basically they accepted, what they did instead was allowing unemployment to rise but they supported individuals through beefed up unemployment insurance and stimulus checks and so on.

Now in Europe policymakers did it entirely differently.

What they did is they tried to preserve labour market matches so they kept employees linked to companies but protected them through those furlough schemes and comparable schemes.

So you've got this artificial state of affairs with regards to unemployment data in Europe.

And actually interestingly the UK went down the European route, the freshly Brexited UK went down the European route in terms of how to protect its labour market.

Now there are strengths and weaknesses to both of these modes of protection or crisis strategies, let's say.

But what we are seeing in the US may hint at what might lie beneath the furlough schemes in the UK and Europe.

And that is really that just as we were just talking about is that the nature and number of jobs has been changed by this crisis and that in many instances in the US, you're finding people are looking for different jobs to the ones that they left.

And that's part of the struggle of this crisis.

And so matching up, making labour market matches between companies and individuals again it's quite complicated.

And there are also some continuing distortions in the US - so there's a very high level of, that very high level of unemployment insurance in some people's minds, maybe deterring people from getting back into the labour market a little bit.

There's other factors as well, risk appetite, with regards to pandemic-related risk appetite is affected.

So there's a long way to go.

And I think the point is that even though US unemployment has dropped a long way from the peaks back in the second quarter of last year, there are still a huge number of people on the sidelines, which just shows what a gigantic crisis this is and was and how complicated it is to get those people back into the workforce.

Quite.

I mean there’s still a lot of newsflow, I think, to come as the year goes on and as we see globally things unfold.

But anything else in particular that you and the investment teams are looking out for at the moment, what should investors be focused on right now?

Lots, as always, Phil.

I think it's a busy rest of year ahead and that's just in the stuff that we can see.

I mean I think there are a couple of things that I would highlight just from our stance which is there's the disbursement of this hard-won European recovery fund with most of the legislative headwinds have been sidelined, moved out of the way, overcome.

So you're going to see big chunks of that I think.

Italy and Spain are going to get a huge portion of that recovery fund and they're expecting sometimes around August maybe a bit beyond that you're going to start to see that hitting the road and you'll see big chunks of that go on energy transition and digital transformation, which should be interesting to see that, like I say, start to be implemented.

And across the pond meanwhile, there are growing expectations that the Democrats are going to go it alone legislative route and try and do as much as they can of this infrastructure effort, the next stage of the spending package, through something called, this legislative reconciliation.

So we'll start to get a better idea about what's coming down the pike in that sense of how much is going to make it through and also importantly how it's going to be funded.

Is it going to be, to what extent are taxes going to rise to offset that big chunk of spending.

I think also the other thing that's interesting out there at the moment is a bit of that pulled reluctance to get vaccinated across the world has seemed to melt away in many countries, which is which is useful.

But you are starting to see a slowdown in the US vaccination rate nonetheless.

But I think in the developed world, the point that we get across in the UK and increasingly Europe and the US you'll see a considerable, if you add together the number of people, the proportion of society that's been vaccinated either once or increasingly twice depending on what vaccine you're using so on and so on, and add that to the blood bank antibody studies, you're seeing a significant degree of resilience now being built up in the developed world or in many developed world countries which is important.

But the point has to be: how quickly can you get the world to that herd immunity level, how quickly can you get the world vaccinated because that's when we will really be able to start thinking about the all clear from this crisis.

And until then it's going to be a complicated journey.

Absolutely a day we're all certainly looking forward to though.

Thanks as always, Will, really great to get your thoughts.

And thank you, our listeners, for joining us again for another Monthly Market Insights.

If you would like to hear more from us between now and next month please do seek out our weekly podcast Word on the Street, where we share all of our latest thoughts on market developments.

Otherwise, Will and I look forward to being back with you next month.

When should we expect the all-clear?

As part of our aim to keep clients informed of our current investment views and how these themes are impacting your discretionary portfolios, Phil Attreed, Head of Investment Consulting, talks to Will Hobbs, Chief Investment Officer, about the latest market movements, future inflation expectations, and what to expect from the second half of the year.

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