US and European stock markets remain at record highs (except the US technology NASDAQ index) as commodity prices rally on hopes that the global economic recovery will continue to gather pace. Even the UK, has seen the strongest inflows from foreign investors since at least 2016 and many see UK equities as offering good value to global investors.
Oil and gas stocks generally are buoyed by a strong Brent oil price of over $70 per barrel. That price supported by the fact that Saudi Arabia and Russia said that while demand is recovering, there are still persistent uncertainties linked to the pandemic that stop them increasing output further. Expectations for peak growth have dominated investor conversations. A survey of factory executives in China, arguably the world’s biggest emerging market, confirmed the global economic recover gaining speed.
Factories are trying to meet demand and this is where supply bottlenecks are showing and pricing is becoming inflationary. In another sign of rising inflation, eurozone consumer prices rose 2 per cent in May from the same month in 2020, with energy prices leading the way with a 13.1 per cent annual surge.
Indeed, inflation remains the major uncertainty for investors. US inflation is also running above the central bank’s target at 3.1% but central bankers believe the inflation rise to be a temporary blip and, in the US, particularly, there is a priority to get employment back to pre-Covid levels by maintaining a super soft monetary policy. Whether that policy changes is a big concern for the markets. The US 10-year yield, which is super sensitive to inflation, has held a stead 1.60% over the last couple of weeks. Gold too, at $1,900 per ounce has risen over the last month but is holding steady at these levels.
Such accommodative monetary policies not only include short-term interest rates of almost zero but the US purchasing $120 Billion bonds a month and the ECB EUR 80 Billion. Investors, fear the day when that support ceases.
However, the key concern for financial markets is what happens to inflation over the next couple of months – this will be the key driver of asset prices.
Institutional money managers are grappling with a difficult ointment outlook. You couldn’t lose for the past 40 years with bond yields tumbling (prices rising!!) from 14% in the 1980s broadly 1% /1.5% today and stocks multiplying 5 or 6 times in that period buoyed by steady economic growth and technology advances. But where do you invest now with stock valuations pricing in the most optimistic of global economic recoveries and bond yields still not much above zero? This of course has fuelled the investment interests in alternative assets – everything from Private Equity and Venture Capital to the largest investment teams evening buying companies directly either alongside a PE partner or directly. Infrastructure projects too are of significant interest. Add in commercial real estate (shopping malls, offices, student housing) and you get a very different investment picture than 30 years ago when a fund manager would invest 60% of the fund in stocks and the remaining 40% in bonds.