Phil: Hello and welcome to this July edition of Monthly Market Insights. I’m Phil Attreed, Barclays Head of Investment Consulting, and once again I'm joined by Will Hobbs, our Chief Investment Officer, as we explore what's been going on in the world of investing. So, Will, we've made it through the first half of what I suppose to many will have been frankly an incredibly emotional and exhausting 2021 so far when it comes to their personal lives but what stands out for you as you look back over the last six months?
Will: Gosh, again Phil, always start with a big question. I think the story of the story of the year so far I think probably is that gigantic growth upgrade that we saw over the course of the year, which has really fuelled the continuing rally in stocks, commodities, and rising bond yields across many parts of the capital market spectrum.
And behind that upgrade, we've identified this before but there's probably two big things you'd look at: one, when viewed from the January perspective that the path of the pandemic, at least in the developed world has been a little bit less damaging than might have been feared and that has helped a little bit with some of those upgrades.
The other thing to think about I think is that policymakers have continued to surprise positively and this is particularly the case in the US where as we pointed out many times before you had that ‘sliding doors’ moment in January with those two Senate runoffs which handed President Biden the Senate, the very narrow margin in the Senate and the ability to enact at least some of his agenda and that's changed the picture of the half substantially I think.
Phil: Quite. Alongside that big growth upgrade that you speak of has also come some fairly material concerns from investors about a change in the trend for inflation. Are we any closer to having a look at what might be in store for us in the coming months and years ahead yet?
Will: Probably not, no. I mean you're right, that's very much the story of the half isn't it? But unfortunately it's way too early to say anything really meaningful on this as we say. We suspect that there are risks to both sides of expectations.
You can plausibly describe both: one, if you look through the prism of history and look at the recovery from past pandemics, you and I have discussed many times before, how the message there quite statistically robustly is that you should expect a long protracted period of lower growth and lower inflation on the aftermath of pandemics.
However, others will point out that the economic context today is very different and very important not just in the way that it's potentially changing those tectonic plates with regards to labour force supply might be changing a little bit, but also some of the factors with regards to how policymakers have responded to this crisis that has led some people to argue that the risks to inflation are the upside.
So I think the point from us is that we're prepared for both extremes and everything in between. But beware of strong opinions here; as we've said many times before, inflation forecasting is not an area where strong opinions are a sign of great skill quite the reverse.
Phil: Of course keep to other things. And what are the key areas of focus, though, for you and the investment teams as we turn to hopefully a much brighter and freer second half of 2021?
Will: Let's hope so. I think the point there, I mean the buzzkill point to make straight away is that the pandemic is a long way from over. There may be the sting of more variants in its tail as we get through the next year and year and a bit to that point when people are saying that we might be reaching global herd immunity, which is really the moment to to bear in mind.
The Delta variant is rapidly becoming a dominant strain in many developed economies, the UK most of all actually. Something like 80, 90% of the infections is the Delta strain at the moment; however, the evidence here so far points to that rapidly constructed wall of immunity holding firm so far, so hospitalisations and deaths have so far remained low in the areas where Delta has taken off, we shall see how that evolves.
Also in the second half you're going to see what happens with the US infrastructure effort. So also the disbursement of the newly acquired European fiscal muscle is also likely to be important, things to keep an eye on in the second half of the year.
No doubt inflation and central bank interest rate takeoff debates will continue to prattle on. However some people are pointing out that the bond market has so far remained pretty calm about the prospects for inflation, very much staying in line with the Fed’s, the central bankers’ communication on this which is that the risk to inflation beyond this crisis is still moderate.
And the bond market so far seems to be taking that on and that's in the face of some quite steep inflation beats over this last quarter in particular.
So we'll see what it takes to shift that consensus a little bit. Obviously when we're looking ahead always the point to make is the most jarring things to asset prices tends to be the things that you can't talk about in advance because they come out of the blue, the market has had no chance to try and incorporate probabilities of various outcomes happening into prices because it's a completely new piece of sudden big information, like this crisis.
So those are always the things that are most influential but from the stuff that we can see, I guess those are the things that the team's looking at a little bit.
Phil: Great. Not an unusual question to have from clients, one that we've certainly had for a number of years now, but I think just looking at market levels right now some of our clients, some of our colleagues are clearly worried about global investment markets starting to look a little on the expensive side.
I’m also confident of one thing we will almost certainly see headlines fueling this opinion over the coming months and I’m sure years. For some though it just does feel too late to get in having seen the rally from the lows of last year what would you say to this?
Will: It's something that you and I have talked about many times over the years isn't it? It is that to us included and to all people I think: when markets are rising, they feel expensive and it feels like you've missed out particularly if there's something quite sharp in the rearview mirror in terms of a rise, it feels like I've missed the boat, I should have got in ages ago and I can't get in now; and when markets are falling, it feels like it’s way too risky.
So there's never a perfect moment to buy I think, that's the first thing to acknowledge. The other thing to say is I don't think stocks in aggregate look prohibitively priced. As always with the world's capital markets, there are pricey corners and less pricey corners. I still would argue as well that from this point, and I think all of us would argue in unison that from this point, looking over the decades ahead a diversified basket of capital markets’ assets (stocks, bonds, commodities, and so on) still looks your best bet to beat inflation over the path ahead.
Whatever inflation turns up that still looks to be your best your best route, so today is still the best day from that perspective. And I think from an upside threat or a potential let's say, not a threat, if things go better than we might expect, but that comes from the suspicion that we might be entering into a period of more rapid industrial change a so-called industrial revolution we've talked about this a lot as well.
It's a very familiar theme and that represents often a very attractive period to be invested. So, it's self-serving as always, but I still think today is the best day to get invested if you're not invested yet and if you are invested to make sure that you're well diversified. Those are the two main calls to action I guess that we always have, but that's no different today as it is last year at this same time or indeed right at the bottom when things were really dark in March.
Phil: Quite and I think that's a perfect opportunity for me to plug our weekly Word on the Street podcast, yourself and Alan did a fantastic job last week with Nicky hosting talking about exactly that ‘fourth industrial revolution’ as well some very good insights and I would certainly encourage our listeners to seek out that podcast Word on the Street.
We published that on a weekly basis; if you'd like to keep in touch on our views in between these Monthly Market Insights. With that, Will, thank you so much for your thoughts as always and we look forward to being back with you again next month.