Stanhope Capital Fortnightly Bulletin – Period ending 15 June 2021

Tactical Positioning

The S&P 500 reached an all-time high in the last two weeks whilst the Volatility Index (“VIX”) hit a 15-month low. A low reading on the VIX typically means that there is low level of ‘hedging’ activity which is taken to mean that investors feel comfortable with market levels, but this could reflect investor complacency. Our view is that markets are settling into a trading range, pausing whilst higher inflation data feeds through. We now have a month before US second quarter company results start and an equity market consolidation in the meantime would seem healthy.

Market Moves

The weather is not the only thing heating up. Inflation, as measured by the US consumer price index (“CPI”), rose 5.0% year-on-year in May. Additionally, the core index, which excludes food and energy, rose 3.8%, its largest 12-month increase since the global financial crisis in 2008. This substantial increase is partly magnified by the collapse of prices last year; although it still rose 0.7% last month alone. Despite rising inflation, the S&P 500 reached all-time highs and government bond yields fell to their lowest levels this quarter.

Investors seemed to agree with US Federal Reserve chair, Jay Powell, that the sizable CPI increase is nothing to be concerned with, and they could be right. One of the main contributors to the spike in CPI was an increase in second-hand car prices, in part owing to a global shortage in semiconductors, widely used in modern vehicles, causing supply chain bottlenecks. Eventually, car production should recover and second-hand car prices may then fall back. Other categories that also contributed are fuelled by the reopening of the economy, including car rentals, flight tickets, restaurants and, to a lesser extent, hotel room prices.

As the European Football Championship kicks off, much of Europe is pressing ahead with lifting restrictions. However, the UK government’s proposed easing of lockdown has been delayed owing to the spread of the Delta variant, first identified in India. Given the UK government’s reputation for moving the goalposts, the market’s reaction was muted. France, still under night-time curfew, is set to lift its requirement for wearing facemasks in public and Germany is due to end enforced working from home amid falling coronavirus infections.

Prime Minister, Boris Johnson, hosted the 47th G7 summit in Cornwall over the weekend where the focus was on climate change, the pandemic response, and how to address growing tensions between the West and China. Finance ministers from the seven participating countries recently reached an agreement to implement a minimum corporate tax rate of 15% in each of their countries. The uniform tax rate would force some of the world’s biggest companies to pay more tax in countries where they operate, as opposed to where they are headquartered. The brunt of the tax rises will likely be borne by technology companies, such as Amazon, Google and Facebook which have large global footprints and generally pay lower effective tax rates. Despite the agreement, implementation is expected to be slow, and no significant impact has been felt on share prices yet.

Economic Updates

Economic data continues to be mixed. In the US, Nonfarm Payrolls missed expectations, with 559K jobs added in May rather than a predicted 650K additional jobs. On the other hand, April’s Job Openings and Labor Turnover Survey exceeded predictions by almost 1 million hitting 9.3 million, the highest since records began in December 2000. Whilst education, mining and logging job openings decreased, these were more than offset by increases in food services and accommodation.

In the EU, the Eurozone Sentix investor confidence gauge rose to 28.1, a three-year record, while German industrial production for April slowed with a 1% decline against expectations of 0.5% growth. This might suggest a shakier recovery than initially expected. Across the channel, the UK Services Purchasing Manager’s Index (“PMI”) for May was at 62.9, was above expectations of 61.8, while the Manufacturing PMI underperformed coming in at 65.6 versus the 66.1 projected. Nevertheless, any reading over 50 is consistent with expansion.

Finally, contradictory messages came out of China. The producer price index (“PPI”) rose 9% in the year to the end of May, the fastest since 2008 and outperforming expectations, as commodity prices surged, whilst the consumer price index climbed less than expected at 1.3%. In an effort to prevent overheating and to protect margins, the Chinese Government have responded to the surge in PPI with a plan to release some of their commodity stockpiles. Timing and quantities are not yet confirmed – and are unlikely to be! – and there is some scepticism around the efficacy of this plan, with Citigroup economists noting that “Industrial inflation pressure will likely remain and pose additional risks to economic growth.”