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August 2021 Investment Outlook by Tilney’s Head of Multi-Asset Funds, Ben Seager-Scott

Welcome to Investment Outlook. This publication, which replaces our monthly Market & Economic Outlook, covers events during July 2021 as well providing a look forward.

A tale of two markets

The equity and bond markets appear split on the global growth outlook. The MSCI All Country World equity index has rallied 11% (GBP, total return terms) this year on the back of a global growth recovery and accommodative policy support1. In contrast, the US 10-year Treasury yield has trended down since the end of March. As a rule of thumb, lower government bond yields generally reflect weakening economic activity and vice versa. Clearly, both markets can’t be right on the economic outlook.

Although volatile, the equity market appears relatively upbeat on future company earnings. The consensus currently forecasts historically high one-year forward global Earnings Per Share growth of 19%, albeit down from a cyclical peak of 27% in June2. As we discussed in the July Investment Outlook, private consumption, the driving force for the GDP expansion and company earnings, remains underpinned by healthy finances.

Reopening from lockdowns adds another layer of support for the consumer expansion. For instance, by removing remaining social distancing laws in England on 19 July, sectors such as leisure and hospitality will be able to boost operations and revenues
Aside from consumption, supply shortages brought about by the pandemic are stimulating a new capital expenditure cycle. As a lead indicator of company investment, the Business Roundtable US Chief Executive Officers survey on capital spending plans rebounded to its highest level in nearly two years in the second quarter3. Provided demand can be sustained, there is a solid base for companies to deliver on markets’ earning expectations, the fundamental driver of equity prices.

For the bond market, it is possible that yields have been anchored down by technical factors related to money flows into the US bond market (the world’s largest), rather than a deterioration in underlying growth. For instance, Treasury demand has been supported by international investors adding to positions following record redemptions during the pandemic, while bond supply has been squeezed by the Fed effectively buying up all new Treasury bond issuance during the second quarter. That’s been possible as the US government has run down cash balances raised during record bond sales last year for fiscal spending. Bond yields have also been lowered by a Fed that is intent on keeping policy accommodative. In short, prevailing market bond yields may convey an overly pessimistic economic outlook.

Market risks to watch over the summer

Despite the relative upbeat macro backdrop above, we identify three drivers to monitor as potential sources of asset price volatility during the summer months.

1. Elevated inflation: Consumer price inflation has increased globally, and particularly in the US, where June underlying core (ex-food/energy) inflation accelerated to a 4.5% annual rate, its fastest clip for 30 years4. Higher inflation could feed through to equities via multiple channels. First, the rising cost of living has encouraged workers to demand higher wages, adding uncertainty over company profit margins. Second, if goods and service prices become increasingly unaffordable it could depress growth through “demand destruction”. And third, central bankers may surprise markets by reining back on accommodative policy. In July, Bank of England Monetary Policy Committee member Michael Saunders warned that if activity and inflation indicators remain in line with recent trends and downside risks do not rise significantly, “then it may become appropriate fairly soon to withdraw some of the current monetary stimulus.” Given equities have been boosted by the easy money policy, taking the liquidity punchbowl away could unsettle markets.

2. Covid mutations: With just over 14% of the world population fully vaccinated, Covid is likely to remain an ongoing market risk5. The rise in the more infectious Delta variant has led some governments to implement consumer restrictions, such as excluding the unvaccinated from bars, restaurants and shopping centres in France from August and spectators at the Tokyo Olympics. Moreover, the UK government’s Test and Trace app has led to increasing numbers of people being ordered to self-isolate, which can disrupt economic activity in a so-called “pingdemic”. Nevertheless, given that the UK Office for National Statistics reports that an estimated 90% of the adult population have tested positive for coronavirus antibodies in England, the vaccine rollout and herd immunity is proving so far to be fairly effective in breaking the link between infections and deaths/hospitalizations6.

3. Peaking economic growth: The global All Industry Purchasing Managers Index (PMI), a broad-based proxy of growth that include manufacturing and services, peaked in May and has raised uncertainty over the growth outlook. However, we found that global equities generally produce positive forward returns when the global growth rate peaks. For instance, during the last two business cycle peaks, in April 2010 (after the Global Financial Crisis) and in January 2004 (after the bubble), forward four-year annualised global equity returns were 12% and 11%, respectively7.Though when growth slowed from a bubble peak in April 2000, the four-year annualised equity returns were -5%, largely because the global Price-toEarnings (PE) valuation of 22.8 times was high at the time8. Global equities are less demanding than during the era and currently trade on a PE of 18.7 times9.

To sum up, with bond yields low, equities still look an attractive place to generate returns in the current growth outlook. However, risks have risen, and this could lead to rising market volatility.

1-9 Refinitiv Datastream/Tilney, ONS, data as at 28 July 2021


Equity markets have been jittery of late as investors have become concerned that global growth is peaking. Looking at the last 2 business cycles, equities have continued to rally after economic growth peaked, as evidenced by the Global Purchasing Managers Index. There is still room for equities to continue to outperform bonds as growth normalises from this peak.


The difference between US 10-year and 3-month Treasury yields, the yield curve, is often considered a bellwether of economic activity. If economic activity is thought to be accelerating, the yield curve steepens in expectation of higher interest rates. Since the beginning of the year, the curve has actually flattened, from 1.7% to just 1.2%, as bond traders price in slower activity in the future, something already forecasted by economists.


Sterling has been appreciating against the USD since March 2020 and hit a 3 year high at $1.42 in May 2021. Over this period it has proved to be a cyclical currency, moving with the MSCI World Index of developed market equities. However, over the last few months the currency has declined to a value of $1.39. This is likely due to simmering tensions with the EU over the terms of the post-Brexit Northern Ireland protocol, and the rapid spread of the Delta variant of COVID-19. As COVID cases start to come down and the global economic recovery motors on, sterling should continue to be supported.

Market commentary

The unprecedented global economic recovery experienced after the initial shock of the pandemic continues to be tested. As economic data has started to come off record highs, concerns of peaking global growth has weighed down particularly on bond markets; in July, the US 10-year Treasury yield fell from 1.4% to 1.3% and the UK 10- year Gilt followed suit falling from 0.7% to 0.6%. Global equities returned just 0.1% (GBP, total return), however, returns were mixed geographically. Emerging markets have been a laggard falling 7.3% due to the spread of the COVID-19 Delta variant and the Chinese government crackdown on large tech companies. The Delta variant has also been a drag on UK equities returning just 0.7%. Whereas the US has been boosted by strong earnings to end the month up 1.7%, outperforming its peers. Despite some concern on the economic outlook, we still consider the macro backdrop to be supportive of a risk-on environment and conducive to equity market performance.

All values and charts as at 31 July 2021. Total returns in sterling.

Returns are shown on a total return (TR) basis i.e. including dividends reinvested (unless otherwise stated).
Net return (NR) is total return including dividends reinvested after the deduction of withholding tax.

Source: Thomson Reuters Datastream and Bloomberg


Please remember the value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

This document contains information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This is neither an offer nor a solicitation to buy or sell any investment referred to in this document. Tilney documents may contain future statements which are based on our current opinions, expectations and projections. Tilney does not undertake any obligation to update or revise any future statements. Actual results could differ materially from those anticipated. Appropriate advice should be taken before entering into transactions. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. The officers, partners and employees of Tilney, and affiliated companies and/or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and may trade in any such investment.


MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

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The Bank of England base rate, Retail Price Index (RPI), Consumer Price Index (CPI) and Sterling Overnight Index Average (SONIA) are public sector information licensed under the Open Government Licence,

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© Tilney Smith & Williamson Ltd 2021

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