Week ending 22nd October 2021.

Following a turbulent start to the week, the majority of markets ended the week with a flourish following news that Evergrande, the faltering Chinese Real Estate company, managed to repay the interest payment on one of its dollar bonds. The $83.5million payment staved off worry of a default whilst also comforting markets with it seemingly evident that the real estate giant was not prioritising domestic debt. Whilst this repayment is but a small proportion of Evergrande’s overall debt position, far from signifying the flailing business is out of the woods, it does suggest that markets overreacted to the noise. This echoes what we have been saying for weeks, that whilst markets have a tendency to overreact to short term news stories, this volatility introduces an opportunity for investors, particularly with the anti-contagion policies put in place by the Chinese authorities set to isolate Evergrande from the broader economy. Evidence of this can be seen in September’s retail sales data released on Monday, seeing it smashing expectation at 4.4%. This suggests that despite Chinese growth (GDP) missing slightly (which is to be expected given the recent short term shocks), the Chinese consumer is still spending… and we are yet to see the Chinese market fully come back online following the impact of the pandemic!

Earlier in the week we saw the Bank of England Governor, Andrew Bailey, make a comment around raising interest rates to meet inflationary pressures. However, we remain adamant that rates will likely remain low for some time to come. It must be remembered that in the past couple of months we have also seen both the European Central Bank (ECB) and the US Federal Reserve (Fed) state that they expect inflation to run hot for a period (above 2%) due to the transitory nature of the current supply side pressures. This central bank commentary was played out in Wednesday’s European inflation data, seeing it come in at 3.4%, in line with expectation but above the 2% long-term target. This is why we have seen little by way of policy moves and more by way of dialogue from central banks, as we believe they will continue to be reactive and accommodative. Whilst we expect an element of volatility in markets, with inflationary pressures being impacted short term by global supply side bottlenecks and commodity pricing pressures, we fully expect the supply chains and pricing pressures to ease, allowing global inflation levels to trend towards targets, a view echoed by many central banks!

Now we look towards the coming week where all eyes will be on UK Chancellor of the Exchequer, Rishi Sunak, who is set to deliver the autumn budget on Wednesday. In addition, both the European Central Bank and Bank of Japan are set to have their respective policy meetings on Wednesday.

Jonathan Wiseman, Fund Manager