Without a doubt, the biggest threat is the return of inflation, dormant for so long but never extinct.
- The UK stock market is now above its pre-pandemic peak.
- Inflation remains the biggest threat, with prices rising by 5% in the US over the past year.
- Bond markets seem unphased by the latest inflation figures, with central bankers insisting that the rise in inflation is transitory. We continue to monitor the situation closely.
- We have been focusing on and improving the bond components within our portfolios.
The UK stock market rose by another 1% in May, taking its year-to-date gain to almost 11%. Since it was announced that the Pfizer vaccine was effective only seven months ago, the market has risen by 30% and moved past its pre-pandemic peak this month.
With bonds and cash continuing to provide paltry returns against a global backdrop of unprecedented monetary and fiscal stimulus and booming economies, it is little surprise that the path of least resistance for stock markets is upwards, even though valuations are certainly far from cheap. So, what could go wrong?
Without a doubt, the biggest threat is the return of inflation, dormant for so long but never extinct. Last week it was announced that prices in the US had risen by 5% over the past year, the fastest increase since August 2008. In China, the home of cheap manufacturing and a main engine of the deflationary trends we have seen over the past decade, factory gate prices rose by 9% in the year to May. China is now seeing the same demographic trends as most of the Western world, with an ageing population, declining birth rate (despite the relaxation of first its one child and then its two-child policies) and a shrinking workforce.
Bond markets, however, have been unphased by the latest inflation numbers, seemingly willing to accept the promise of central bankers that the rise in inflation is transitory. And that is the six trillion-dollar question. Is it transitory or the beginning of a more structural trend that could see central bankers suddenly racing, through higher interest rates, to get the inflation genie back into its bottle? We are monitoring the situation particularly closely, as it may have implications for investment portfolios.
Back at the coalface, we have been focusing on the bond components of our portfolios. With core yields so low, we need our investments in bond markets to work harder for our clients.
Charles Hovenden, Portfolio Manager
Park Hall Financial Services Limited is authorised and regulated by the Financial Conduct Authority.
The information within this article is for information purposes only and does not constitute investment advice. They represent the opinions of the fund manager and those of Square Mile. It does not contain all of the information which as an investor may require in order to make an investment decision. Any reference to shares/investments is not a recommendation to buy or sell. If you are unsure, you should seek professional independent financial advice.
Past performance is not a guide to future performance. The value of any investment and any income from it is not guaranteed and can fluctuate depending on investment performance and other factors. you could get back less than you invested.
Some investments, e.g. property, may be difficult to sell and will be subject to market conditions at that time. Their value is the opinion of an independent valuer.
Any reference to taxation is dependent on your own particular circumstances which are subject to change.
