“Sell in May and go away, come back on St. Leger’s Day.”

With global turmoil over the summer, the potential of stagflation, and central banks starting to act, Paul Williams, Director of Research at Blankstone Sington, gives his assessment of Quarter 3, 2021 and beyond.

The old City of London adage held some sway this year. The U.K. market has done very little over the summer. That is an achievement because there has been plenty to worry about – turmoil in Afghanistan, China’s crackdown on technology and property companies, Fed tapering, rising inflation, supply chain disruptions, slowing economic recoveries, and a German election, to name some of the main concerns. As we move into the final quarter covid is starting to fade from the news, if not from the population. That is helpful for sentiment, although it is countered by the weight of potentially negative developments, which are slowly draining the momentum out of the global equity rally.

The big debate during Q3 was about when will central banks begin to tighten monetary policy? The debate in Q4 may move on to stagflation. Economic data is currently trending below expectations having beaten expectations during most of the recovery of the last 12 months. This suggests a slowdown, which could become a stagnation if it continues. Meanwhile, prices continue to rise and there is no sign of respite. Brent oil has nearly doubled over the last 12 months to nearly $80 per barrel, concomitant with strong rises in the cost of gas and electricity. This will add to supply chain difficulties, ultimately putting more upward pressure on consumer prices.

Government and investment grade corporate bonds are not attractive as most offer negative real returns, and with equity markets in the U.S. and Europe losing upward momentum/entering a much-needed correction, investors are going to have to be very selective in Q4. Asian Pacific equities have been trending lower since February and are now starting to look interesting again. That said, equities are not cheap anywhere on a historical basis, but the U.K. remains less expensive than other developed markets. Value stocks outperformed earlier in the year on the ‘reflation trade.’ With yields rising again companies trading below their perceived intrinsic value, particularly those that are economically sensitive, could come to the fore once more. This group tends to include Financials, Energy, and Mining, as well as certain cyclical businesses in sectors such as Industrials, Retail and Real Estate.

This article does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of our advisors. Past performance is not a reliable indicator of the future. The value of your investment can go down as well as up, and you can get back less than you originally invested.