TRADITIONALLY a quiet time, the markets last week saw some dramatic moves, emphasising that these are not normal times.
US smaller companies fell markedly – the Russell 2000 was down 4.2 per cent over the week and the Dow Jones Industrial Average had its worst week since January, finishing 3.45 per cent lower. Closer to home we saw the FTSE 100 give up most of its hard-won gains, slipping back to the 7000 level once more: it was down 1.63 per cent over the course of the week.
What caused this big sell-off? Essentially the prospect of higher interest rates which was driven by hawkish comments from the Federal Reserve. The threat of inflation is becoming a reality: in the UK inflation is now above the official target of 2 per cent (it was 2.1 per cent in May, up from 1.5 per cent in April) and recent figures from the US saw headline CPI (consumer price index) inflation up by 5 per cent in May (4.2 per cent in April).
Debates have been raging about the impact of such massive injections of cash that we have seen as central banks sought to lessen the impact of the pandemic. This in turn puts pressure on central banks to raise base rates: in the UK the Bank rate of 0.1 per cent looks low in the current context of rapid recovery and rising price pressures (one of the most dramatic is the rise in industry’s raw material and fuel costs which rose by 10.7 per cent in the 12 months to May) and other examples of upward pressure are rife: average earnings were up by 5.6 per cent in the three months to April and producer prices are accelerating.
In addition, the property market is seeing runaway price rises in several areas as people reassess their priorities after the last 18 months. These remain extraordinary times, therefore and it is still probably too soon to determine whether this inflation is transitory or structural. Traditionally economists have not had a good record of successfully predicting inflation, which makes it extremely difficult to see what lies ahead.
There is clearly perceived value in the market currently (the approach by private equity giant Clayton Dubilier & Rice to Morrisons in a bid worth £5.5 billion is evidence of this).
There is also a great deal of hedge fund activity – property company British Land is facing a substantial short position and there has been pressure on GlaxoSmithKline from activist New York hedge fund Elliott Management to convince investors of its strategy to become a standalone pharmacy business.
It remains, therefore a somewhat confusing picture in terms of global markets: apparently there is value to be had but we also face risks in economic terms as well as Covid-19 terms.
In all it is apparent that getting back to normal is some way away and the summer looks as though it will be an interesting time – although the old adage sell in May and go away may yet prove to have some merit!
:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.
