Global equities slipped back a little last week, posting their first weekly decline since the beginning of October. The pause was overdue and can’t really be attributed to any of the recent economic data.
The deluge of numbers released in the UK were all rather stronger than expected and seemed to cement the case for a rate hike in December. At least that was until Bank of England governor Andrew Bailey said over the weekend that the risks to the Bank’s inflation forecasts were two-sided and a rise was not a done deal. Still, after the debacle surrounding his steer towards a rate hike in November, which then failed to occur, his latest pronouncements will be treated with some scepticism.
UK consumer price inflation jumped more sharply than expected in October to a 10-year high of 4.2% from 3.1%. Household energy bills, along with fuel, second-hand cars and restaurant and hotel prices, all contributed to the increase. On the now largely defunct retail price measure, inflation reached as high as 6%.
Price rises looks certain to increase further over coming months, with consumer price inflation likely to peak at around 5% next spring. However, it was last week’s labour market data which most obviously gave the green light to a rate rise, painting a robust picture despite the ending of the furlough scheme.
Job vacancies hit a new all-time high in October. Equally impressive, payroll employment rose further to 0.8% above its pre-pandemic level, even if overall employment remains some way below due to a fall in the number of self-employed. Meanwhile, the unemployment rate fell to 3.9% in September.
The news on consumer spending was also encouraging. Retail sales in October posted their first gain for six months. Moreover, rather surprisingly given the surge in inflation and pick-up in infections, consumer confidence also improved in November.
None of this, however, helped UK equities. They underperformed last week and have now reversed most of the outperformance against the rest of the world recorded since vaccine day last November. Still, we stick with our view that they should outperform going forward given the sizeable discount they trade at.
UK equities currently trade on a 12-month forward-looking price-earnings ratio of 12.4, a little below their 10-year average of 13.4. More strikingly, the price-earnings ratio is currently as much as 32% lower than the rest of the world, a much larger discount than the 12% averaged over the last ten years.
Elsewhere, there was news of an unexpectedly large gain in US retail sales in October. This points to a strong rebound in GDP growth this quarter, following a marked slowdown last quarter. President Biden’s 10-year $1.75trn social spending bill was also finally approved by the House of Representatives and now heads to the Senate.
In Japan, the government launched its largest ever fiscal stimulus package totalling a headline grabbing $380bn or 8% of GDP. As usual, smoke and mirrors mean the actual stimulus should prove significantly smaller but it is still a welcome move as Japan is seeing the weakest recovery of all the major economies.
It was in Europe where the news took a turn for the worse, with the latest wave of coronavirus infections leading to new restrictions being imposed in a number of countries and Austria re-imposing a full lockdown. Further restrictions may well follow and will clearly impose a hit on activity.
Even so, any such drag should be much smaller than that seen last winter. Indeed, the longer-term battle against Covid has recently been given a big boost by Pfizer’s Covid-19 pill. This cuts hospitalisations dramatically in early stage infected higher-risk patients and should be widely available from the spring.
In short, while equities are not impervious to Covid developments – European equities are underperforming at the moment – we don’t believe Covid is any longer a game changer for markets. Much more important will be how inflation pans out and how central banks react. With this in mind, next week’s commentary will focus on our latest thoughts on where inflation is headed.
Chief Investment Officer