The S&P 500 gained 14.4% for the 6 months to 30 June 2021. This is the second biggest 6-month gain in performance in the past 21 years. The MSCI AC World Equity Index gained 12.3% over this period. Global bonds experienced a negative return (-2%) for the year to date.
The US Federal Reserve surprised many market agents at its June policy meeting when it started “talking about talking about” monetary tapering, as Chairman Jerome Powell phrased it. The immediate aftermath of the meeting was a rotation out of risk assets and a surging USD. While the Fed’s message continued to point to an environment of substantial monetary support to the US economy, there were some suggestions that it was turning slightly more cautious over inflationary pressures. It raised its inflation forecasts and acknowledged that inflationary pressures might be more persistent than previously thought. This was also accompanied by an increase in its GDP forecasts and, most notably, a change in its quarterly policy projections.
As things stand, there is reason to believe that both inflationary pressures and constraints to the labour market’s recovery are transitory in nature. As such, the Fed will likely continue to monitor developments on these fronts and gradually prepare global markets for the eventual taper, which is broadly expected to begin at the end of next year.
While the world has made tremendous strides in combating the COVID-19 pandemic, a full economic recovery remains uncertain despite forecasts that expect a 6.1% GDP growth projection for the global economy this year. The availability and acceptance of vaccines will largely determine when countries can move to a post-pandemic state. While the emergence of new variants poses a risk to this process, experts are confident in the vaccine efficacy against the known strains. Working from home may be the new normal for some employees, while others return to the office full-time. Regardless, the general landscape of office occupancy will structurally change, which may have unknown consequences in the future.
We watch developments carefully while we still favor equities above bonds and cash, we expect a volatile environment for the rest of this year as all the factors mentioned will influence market behavior.
Roeloff Horne
Director and Head of Portfolio Management
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