If one looks at the most recent market developments, especially in the UK, one could summarise the outlook as follows: investors should prepare for growth and watch out for inflation [i]. Headlines and concerns about inflation have certainly become more frequent as investors look to potential sources of yield to invest their money. Meanwhile, house prices in the UK have continued to go from strength to strength in a move that now looks sustainable in the short-term – even over the next four years, according to a report by Capital Economics [ii].
Chart of the month: Weekly flows of global dividend funds ($m)
Source: EPFR, FT, Blend Network
Politics & Economics
- In early-June, the UK reported zero daily deaths from covid-19 for the first time since the start of the pandemic in March last year. The UK’s vaccine roll-out has been a stellar success. Over 75% of adults had received at least one jab as of early-June [iii].
- Inflationary pressures have started to weigh in across many developed economies. ‘A new economic era: is inflation coming back for good?’ read the title of an article in the Financial Times on 1 June [iv]. While the Bank of England deputy governor said the bank was carefully monitoring Britain’s booming housing market as it weighs up the possibility that a rapid recovery from the Covid-19 pandemic might lead to a sustained period of inflation [v]. The EU’s annual rate of inflation leapt to 2% in May, passing the ECB’s target of “below, but close to 2%”, for the first time in more than two years. In Germany it hit 2.4% (up from 1.6% at the start of the year). The ECB, along with the Federal Reserve, insists that surging prices are temporary and will eventually ease [vi].
- In its latest outlook the OECD forecast the world economy to grow by 5.8% this year, a sharp upward revision from its prior estimate. The success of vaccine rollouts across the rich world and huge stimulus programs have helped improve global prospects [vii].
- UK retail spending has soared as the economy reopens. April sales jumped 9.2% month-on-month after rising 5.1% in March. Clothing sales soared by almost 70% [viii].
- The average UK house price soared by 10.9% year-on-year in May, the largest increase seen since August 2014 and only the fourth biggest increase over the past decade. According to the latest data [ix], the price of the average UK house has soared by almost £24,000 over the past twelve months and by nearly £12,000 in the year-to-date.
- The number of housing transactions have also seen a huge increase in recent months: transactions plunged to a record low of 42,000 in April 2020 but reached a record high of 183,000 in March this year following a steady recovery throughout the summer and especially during the period leading up to the expected end of the stamp duty holiday.
- Investors have started to pour cash into dividend stocks as the economic recovery gathers pace [x]. In all but two weeks since the beginning of March, there were net inflows to global dividend funds, reversing months of mostly outflows. For the week ending 2 June, global dividend funds pulled in $675m alone (see chart of the month).
FX & Commodities
- Rising energy costs are a big factor driving inflationary pressures described above [xi]. Petrol prices reached a seven-year high in the US earlier in June and there is little sign of prices easing in the near future. In early June, Brent crude reached over $70 a barrel for the first time in two years, after OPEC+ (which includes Russia) signalled that the demand for oil will increase later this year. The glut of oil that kept prices low before the pandemic has diminished enough to encourage OPEC to raise output.
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[ii] Housing Market Update: How the housing market survived Covid-19. Capital Economics, 28 April 2021
[ix] Source: Nationwide House Price Index https://www.nationwide.co.uk/about/house-price-index/headlines