The Global Supply Shortage - T&T Quarterly Market Update – Q3 2021
by Thomas Quinn on Oct 22, 2021
Reading Time: c.6 mins
We have gone through what some are calling the easy part of the cycle, and we’re beginning to feel the effects of the collaborative central response to the Covid shutdown, and the downsides of enormous fiscal stimulus are appearing in a couple of ways.
However, household savings rates are high, household debt is trending lower, house prices have risen, the jobs market is strong, businesses are confident and investing. These are good foundations for a continued positive economic recovery.
First, as always, we’ll start the quarter with the market data.
Quarter by Numbers
Developed market equities broadly treaded water over Q3 with the US S&P 500 +0.6%, the UK FTSE All-Share +2.2%, Europe Ex-UK (MSCI) +0.2%, and Japan (TOPIX) +5.3%.
Asia and Emerging Markets moved lower over the quarter as China made sweeping regulatory changes in the technology sector along with how the education sector can turn profits. We also saw Evergrande, a large Chinese real estate company, on the brink of defaulting on its debt. MSCI Emerging Markets were down -8.0% over Q3 and Asia ex-Japan (MSCI) lower still -9.2%.
Bonds were relatively flat as the Federal Reserve and Bank of England discuss curtailing the purchase of assets (quantitative easing – buying up government bonds and financial assets to inject money into the economy) and rising interest rates. The European Central Bank is a little behind that curve and has no plans to raise interest rates soon. More on rising interest rates later…
Commodity prices were up +6.6% as demand continues to outstrip supply. GBP was down -2% against the dollar over the quarter – more on this here YOUTUBE CHANNEL
Q3 has been a story of sideways market movements as the increasing risks of inflation and supply shortages are concerning investors.
Global Supply Shortage
It’s not only the US that’s suffering from supply shortages, in China there’s a coal and paper shortage. In India it's computer chips and cars. Brazil has a water and coffee shortage. USA has a shortage of toys and toilet paper along with semiconductor chips which is a global problem.
The global supply chain isn’t acting the way it normally does. Covid for one has changed consumers buying patterns from spending money on events, travel, and eating out to physical items for the home and an adjusted ‘new’ life. With a particular concentration on items requiring a semiconductor chip; laptops, phones, computer cameras, kitchen appliances, etc.
Shipping costs have also almost quadrupled in some cases, and the costs are either being passed on to consumers (causing higher inflation) or smaller businesses aren’t forking out causing to supply shortages (causing higher inflation).
Inflation may be hanging around for longer than originally anticipated.
Inflation & Interest Rates - 101
Approximately 40% of all US Dollars in global supply were printed in the last 18 months.
That is staggering and hard to comprehend statistic. This stimulus is one factor leading to the higher inflation we’re seeing, but why?
If you give businesses and people more and more money, they buy and more and more things. The world consequently becomes short on goods, so there are less goods available thus the price goes up. A common example of where we see this supply/demand relationship is oil is if there’s less oil in circulation the price per barrel goes up. If there’s oversupply the price goes down.
This is what’s currently happening in the global economy. This means your cash is going down in real terms every year, currently by 5.4%. So, you might be earning 150k like last year but this year it’s worth 141,900k unless you’ve had a pay rise.
This is the pressure currently on the Fed, the value of your USD in the bank is going down 5.4% meaning you can’t buy as much as you could last year. The Fed could raise interest rates to support the cash in your bank however, your debt (credit card, mortgages) would rise, corporate debt would rise, and do this too quickly the economy slows down and the market falls.
The Fed has indicated an easing on printing money (QE) in November (good for lowering inflation) and 2023 is penciled in for rising interest rates (good for cash in the bank and bonds – negative for debt and maybe the economy if raised too quickly).
Our view is, there have been 10 years of low to zero inflation thus the economy can handle some now, wages are growing, consumers have money in the bank, businesses are confident and investing so we remain positive long term, goal-focused, equity investors. If you’re sitting on big piles of cash, which isn’t needed in the short term, then speak with an adviser and put that money to work.
T&T Investment Committee Notes from Q3
- Continued to review Fundsmith UCITS USD and GBP. No changes made, relative underperformance against large passive tracker appears to have been temporary
- Further ESG / SRI / Sustainable research is being undertaken to ensure the consistent methodology is being applied across those strategies
- Topical discussions on China / Evergrande, talking points formed for any clients with questions
- Continued review of overseas GBP and USD strategies along with qualified and non-qualified US-based strategies. No changes were made.
We do not act with discretion over client accounts, any changes mentioned above will be discussed prior to any action being taken.
- You and I are long-term, goal-focused, planning-driven equity investors. We’ve found that the best course for us is to formulate a financial plan—and to build portfolios—based not on a view of the economy or the markets, but on our most important lifetime financial goals.
- Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately 70 times; the cash dividend of the Index has gone up about 30 times. Over the same period, the Consumer Price Index has increased by a factor of nine. At least historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning successful companies rather than lending to them.
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