Quarterly Investment Update May 2021

May 30th, 2021 | News | By Graham Wingar

This quarter has seen the bulk of the global vaccine rollout beginning with the UK leading the G7 economies with its vaccine program. The evidence currently suggests that the vaccine has been effective at reducing infection rates, allowing countries with high vaccination rates to start to ease restrictions with lower infections than previous easing of restrictions.

While the vaccine rollout has been positive for equity markets it has caused bond markets to move lower due to inflation concerns which may come as a result of a boost in economic activity in a post lockdown world. As an example of the inflationary risk of bond markets 10-year UK Government bonds currently yield around 0.8%. This is significantly below the Bank of England’s Inflation target of 2% per annum.

There are already signs of inflation due to the significant deflation of certain goods during the pandemic (such as oil which briefly turned negative in 2020). The returning prices of these such goods are now causing inflation measures to jump up. Although these inflationary increases are temporary. There are longer-term signs of inflation. These could be compounded by supply pressures during the global recovery pushing prices higher.

However it is not only bond markets which need to be wary of inflationary pressures. Companies which require continued significant capital investment to justify their share price will be very sensitive to rising inflation. This is because these companies rely on significant borrowing which will get more expensive if inflation / borrowing costs increase. These are typically companies with a high share price compared to their profit where considerable growth is required to justify those share prices.

With these risks in mind an investment solution which can avoid the increased risks of low yielding bond assets and those companies who are more sensitive to interest rate rises is paramount. To do this your investment solution needs sufficient flexibility to be able to manage their assets allocation to each asset class and the holdings within that asset class (something all Future Asset Management recommended investments do). Investment solutions where their asset allocation or index allocation do not change (some have a static assets allocation to certain indexes / assets) may well start to see mounting pressure from the inflationary risks we currently see.