Morningstar Economic Update August 2021
Outlook for Investment Markets
Although there is still considerable uncertainty about the potential evolution of the pandemic, the global economic recovery from the coronavirus looks like it will continue into next year, providing a generally healthy backdrop for growth assets. Although, the pace of growth will slow down from the initially rapid V-shaped rebound, and there are likely to be ongoing differences between countries that have been able to manage COVID-19 well and those that have struggled. Even if the bulk of the current COVID-linked inflationary pressures ease, fixed interest will continue to be challenged by residual inflationary pressures in the strong global economy and by the prospect of eventual normalisation of monetary policy (particularly in the U.S.). In New Zealand, local business conditions had been very robust, but the outlook was thrown into serious doubt with the sudden (and at time of writing, unexplained) emergence of cases of the delta version of COVID-19 and the imposition of a national lockdown from midnight on Aug. 17. New Zealand’s first round of COVID-19 and lockdowns in 2020 ended with a quicker and larger rebound than anyone had expected--and perhaps that scenario will play out again, though there are obviously high levels of uncertainty around what is proving to be a mutating pandemic. The central bank has sensibly held off on interest-rate rises until the picture is clearer. If events turn out well, and activity returns to normal relatively quickly, the big challenge for corporates will be improving profitability at a time of rising wage and other input costs.
New Zealand Cash & Fixed Interest — Review
Short term-interest rates had started to rise in anticipation of monetary policy tightening by the Reserve Bank of New Zealand, or RBNZ. The 90-day bank bill rate had been steady at around 0.3% up to mid-July but had risen to 0.67% before the COVID-19 news (at time of writing it had eased back a little to 0.55%). Bond yields broadly continue to track the U.S. market--an August rise in yields was matched locally by a rise from 1.51% at the end of July to 1.74% just before the pandemic began, before yields eased back to 1.61%. The prospect of the RBNZ’s move also appeared to have been supporting the New Zealand dollar. Prior to the latest COVID-19 news, it was up 0.8% in overall trade-weighted value since the RBNZ first signalled the start of monetary policy readjustment on July 23. The announcement on Aug. 17 of a new outbreak and consequent national lockdown was a setback. On Aug. 17, the kiwi dollar was at U.S. 70.25 cents and went as low as $0.69 cents, according to the news, though at time of writing it had partially recovered to 69.4 cents.
New Zealand Cash & Fixed Interest — Outlook
Prior to COVID-19, forecasters had expected the RBNZ to raise the official cash rate, or OCR, at its Aug. 18 policy meeting, and some had even suggested that the bank might be best advised to raise it by 0.5% from its current 0.25%, given that there may be an urgency to adjust monetary policy more quickly to the June quarter reality of 3.3% inflation and 4.0% unemployment. The bank sensibly opted to hold off any increase for now, given “the serious health and economic risks posed by the virus,” though it is clear that on the other side of lockdowns, with employment at or above maximum sustainable levels and with significant domestic inflationary pressures, the bank will indeed “further reduce the level of monetary stimulus.”
A gradual move toward less-stimulatory monetary policy also suggests that bond yields are likely to rise. Even before its Aug. 18 meeting, the RBNZ had signaled that it was less committed to keeping bond yields low when it had stopped buying bonds under its “large scale asset purchase programme,” which ended on July 23. In addition to moving to a less-stimulatory monetary policy stance, bond yields might well have risen anyway. Local bond yields tend to follow the U.S. market, and it is likely that U.S. bond yields are heading higher, and local investors might have held out for higher yields, given the erosion of their after-inflation purchasing power when inflation looks likely to be around 2% in 2022. Forecasters have different ideas about how high the local 10-year yield might go by June next year, from a small increase of 1.95% (ASB Bank) through to a sizable rise of 2.9% (BNZ). Somewhere in the middle might well be the best bet: Westpac is picking 2.15% and the ANZ, 2.4%.
With the RBNZ likely to be one of the earlier central banks to start stepping back from previously ultra-stimulatory monetary policy, even if it deferred action this time around, interest-rate differentials are likely to provide support for the kiwi dollar, as are the ongoing global recovery (the kiwi dollar tends to benefit when investors are in relatively relaxed risk-on mode) and high prices for New Zealand’s commodity exports. The ANZ Bank’s commodity price index may have eased back a little in August, but world prices are still 22.5% higher than a year ago and are still near an all-time record. While some forecasters disagreed--the ASB, for example, was not expecting much change in the kiwi’s value against the U.S. dollar from its current U.S. $0.70—prior to the latest COVID-19 news, other forecasters generally saw buying support for the kiwi. For June next year the ANZ and the BNZ were picking $0.75, while Westpac saw it a bit higher again, $0.77. The latest COVID-19 developments may have left those forecasts a bit behind, and the eventual outcome of lockdown remains unclear. But even if the precise numbers change, the balance of probabilities still points to potential for appreciation.
New Zealand Property — Review
The S&P/NZX All Real Estate Index has made a small capital gain of 1.7% year to date and has delivered a total return, including dividends, of 2.9% (3.2% including imputation credits).
New Zealand Property — Outlook
The small gains from the sector, prior to the latest COVID-19 news, were somewhat surprising. Admittedly, it had not been an easy period for New Zealand equities generally, and from that perspective the local REITs had done well to bank a small positive gain when the wider market had gone backward, but a stronger outcome might have been expected. The latest (June quarter) Royal Institution of Chartered Surveyors, or RICS, survey of commercial property in New Zealand, for example, had shown a sector in good operating shape. RICS compiles a composite index reflecting the sentiments of both investors and tenants, and on that basis the net balance of sentiment was positive 10 in the June quarter, the strongest reading of the nine countries RICS covers in the Asia-Pacific region. Expectations for capital growth and rental increases in New Zealand were high by current international standards, with New Zealand even a bit more optimistic than the strong U.S. market.
Colliers’ latest (June quarter) survey of commercial property sentiment had also shown a robust business outlook: “Investor confidence across New Zealand has hit a record high ... The survey which asks questions about expectations of market fundamentals over the year ahead showed national confidence to have reached a net positive result of 38%, surpassing the previous high of 32% recorded in the final quarter of 2018. The proportion of those holding an optimistic view of prospects for the year ahead stood at 51% in June 2021, the highest on record. Correspondingly, the proportion of pessimists fell to the lowest level since December 2018.” Respondents were asked what had been driving the optimism, and the answers were: “the strong performance of New Zealand’s economy, successful management of the pandemic and the low interest rate environment.”
The pessimists were also probed, and they pointed to the potential for interest rates to rise and to the risk of a belated reappearance of COVID-19, and perhaps those factors were indeed responsible for the modest equity gains year to date—and those who had worried about COVID-19 were sadly correct. The outlook is now highly uncertain, and as in overseas property markets, the latest outbreak may intensify longer-term structural challenges for both offices and brick-and-mortar retail. A best-case scenario would be an early return to the strong business conditions pre-lockdown, but the evolution of COVID-19 has made it hard to have a high degree of confidence in one scenario over another.
Australian & International Property — Outlook
The June quarter RICS survey of commercial property showed that the Australian market had been continuing to improve: on RICS’ overall composite index the net balance of sentiment had picked up from negative 13 in the March quarter to negative 4 in June. Australian respondents expected an increase in capital valuations over the coming year--probably, as one respondent noted, because of the “huge weight of money” still looking for yield in a low interest-rate world--but also expected some modest downward pressure on rents. That, however, was before the latest COVID-19 outbreaks, and the likelihood is that operating conditions will have relapsed since then.
More importantly, the new round of lockdowns will have aggravated some longer-term structural challenges for offices and for brick-and-mortar retail. On the office front, the Property Council of Australia’s latest (July) report on the office sector showed only a small increase in the national vacancy rate, from 11.6% to 11.9%, and it is fair comment by the Council that this showed “remarkable resilience” in the circumstances. But as the RBA found in surveying the industry (reported in its latest Statement on Monetary Policy) hybrid work arrangements, part at home and part in the office, are clearly on the rise. It found that while 50% of firms surveyed will keep the same amount of space, and 25% have not yet made a final decision, 25% will be cutting back, on average, by about 25% of their existing space. In retail, the bank said that “The COVID-19 pandemic has accelerated the shift toward e-commerce as consumers attempted to maximise social distancing and comply with lockdown measures ... The accelerated shift toward e-commerce has exacerbated the challenges and risks facing the bricks-and-mortar retail sector.”
It is not all negative. The booming industrial sector with its e-commerce logistics facilities is a big winner in structural change; COVID-19 oriented supportive monetary policy means that interest rates will stay low, helping the yield-driven demand for A-REITs; and equity sentiment is currently minded to look through COVID-19 to better post-pandemic trading conditions. But the office and retail sub-sectors have some uphill challenges.
Overseas, the ongoing recovery in the global economy has helped improve property performance, though, again, there are strong sub-sectoral and regional crosscurrents. The June quarter RICS global survey found that, “The headline reading for global capital value expectations (over the next twelve months) has edged up from -1% to +1% while rental values are viewed as being broadly flat (looking out to the middle of 2022) which compares with a projection for a 2% decline in the Q1 survey.” There was a pronounced sectoral tiering: prime industrial, data centres, and ‘multifamily’ housing were expected to do well, while secondary office and (particularly) secondary retail were expected to keep falling in value.
Other analysts have found similar trends. CBRE for example, in their latest Global Midyear Market Outlook, said that, “The big economies are reopening and a fast-paced recovery is well underway. This will extend through 2022 as vaccination programs accelerate worldwide before ‘normal’ economic growth resumes in 2023.” They saw the same tiering of sectors: At the strong end, “The industrial and multifamily sectors provided tremendous value protection during the pandemic and their rent growth outlook remains strong,” while at the weaker end, valuations of retail and the fringe office properties will continue to be under pressure. Overall, the cyclical upswing is helpful, but investors will need to continue to watch out for subsectoral allocation, which is likely to remain a decisive driver of performance. Over the past five years, for example, investors in U.S. REITs earned a 6.85% per-year return, but within that, industrial REITs returned just shy of 20% a year, offices returned only 1.9% a year, and retail REITs lost money (2.3% a year).
Global Infrastructure — Review
Year to date the S&P Global Infrastructure Index in U.S. dollars is up 5.6% and has returned 7.4% including taxed dividends (9.0% hedged back into New Zealand dollars).
Global Infrastructure — Outlook
Investors are keen on infrastructure assets: In both of the big takeovers currently on the table in Australia (Sydney Airport and Spark Infrastructure) the bidders have come back with increased bids, and the premiums that private equity investors are prepared to pay will likely have a knock-on effect on other listed infrastructure valuations. Investors are also looking to play the Build Back better Theme, where post-COVID spending is directed toward greener options, such as renewable energy and digital infrastructure. The long-delayed U.S. infrastructure spending package is finally getting close to seeing the light of day after being agreed to in the U.S. Senate this month. And while there are still partisan challenges ahead in the House of Representatives, the prospect of some USD $1 trillion being unlocked across a wide variety of infrastructure subsectors, is also supportive. Also, in a global economy where there are currently strong inflationary pressures, the inflation-hedging features of the asset class (such as regulators allowing utilities to pass through input cost increases to consumers) have some appeal.
The patronage-reliant end of the asset class still has its challenges. The upsurge in the delta variant of COVID-19 has made life more difficult for airlines and airports, and the world’s third-busiest container port, the Meishan terminal in China’s Ningbo-Zhoushan port, is currently partially closed after an employee tested positive for the virus. But overall the asset class looks positioned to continue to deliver steady defensive performance.
Australasian Equities — Review
Even prior to the latest COVID-19 outbreak, New Zealand shares had not shared in the wider strength of global equity markets this year, and at the start of the week, the S&P/NZX 50 Index was down 3.7% in capital value and had returned an overall loss, including dividends, of 2.5%. The outcome reflected the drag of two top-10 stocks, A2 Milk (down 47.6%) and Meridian (down 30.7%), which had taken the top-10 index to a 7.4% loss and which outweighed the gains from Fletcher Building (up 32.7%) and Mainfreight (up 22.7%). The Mid-Caps were slightly up, by 1.8%, and the Small-Caps had done best and were up by 8.4%. The immediate reaction to the COVID-19 news on Aug. 17 was a 0.7% drop in the NZX50 Index, taking the year-to-date capital loss to 4.6%.
The Australian share market continues to perform well, and year to date the S&P/ASX 200 Index has gained 15.8% in capital value and returned 17.9% including dividends. The banks continue to be an important driver of performance, with the financials (excluding the A-REITs) up 25.3%. At least until the latest lockdowns, consumer discretionary stocks had also been doing well in the rebound from the first round of COVID-19 and are up 23.7%. The miners have also benefited from the cyclical global upswing and are up 15.0%. Utilities (down 3.4%) are the only sector to miss out. Recent performance was enhanced in early August by the surprise takeover offer for the financial technical company, Afterpay, at a 30.6% premium to its AUD $99.66 price on July 30
Australasian Equities — Outlook
As in many other economies, the reporting season currently underway in New Zealand will not give a straightforward view of underlying corporate performance. While some companies indeed will be doing well, in general, results will also be comparing the unexpectedly strong and fast recovery from COVID-19 in the first half of this year with the COVID-19-dampened conditions of 2020. Matters have been further complicated by the national Level-4 lockdown announced on Aug. 17, and there is no telling how long or how extensive the setback to business activity will be.
All going well, if lockdown is effective, then the past experience with the first round of the pandemic gives us some hope for optimism that business conditions might return to normal reasonably quickly. There was certainly a strong momentum to the economy going into the latest outbreak, and prior to that, 2021 looked like it was going to be a remarkably strong year, with estimates that gross domestic product growth could even end up being in the 5.5% to 6.0% range--the BNZ was picking 5.7% and Westpac 5.8%. The latest readings from the ANZ’s business and consumer sentiment surveys, for example, had suggested that the economy was growing at around a 3% pace, and the most recent (June quarter) consensus forecasts collated by the New Zealand Institute of Economic Research for the year to March ‘23 were pointing to 3.7% growth (albeit with quite a lot of uncertainty, from a low pick of 2.5% to a high of 4.7%). Levels of uncertainty have obviously risen further in recent days, and on the downside it remains possible that the latest delta outbreak will parallel the New South Wales one, which has proved difficult to control. But if anything like the first rebound happens again, then businesses could be back on track reasonably quickly.
On the other hand, a quick recovery will mean businesses also will be quickly back in a world of sharply rising input costs. The RBNZ said that “Capacity pressures are now evident in the economy, particularly in the labour market ... Broader inflation pressures are being accentuated in the near-term by one-off price rises such as higher oil prices, and temporary factors such as supply shortfalls and higher transport costs.” There is likely to be real cost pressure on profitability. The ANZ’s latest business survey found for example that, “Inflation expectations at 2.70% are the highest since early 2012 and look likely to go out the top of the RBNZ’s target range of 1-3% for the first time since 2011, given they were 3.33% in the late-month sample. Pricing intentions also remain extremely high.” And wages growth looks very likely to accelerate: the unexpectedly sharp June quarter drop in the unemployment rate, from 4.6% to 4.0%, showed a labour market that was already tight and likely to become tighter again on the other side of lockdown. Westpac, for example, predicts the unemployment rate will be down to 3.5% by the end of next year, and BNZ has it lower again, at 3.3%.
Overall, top-line sales growth looks to be well-supported, but bottom-line profit growth in the face of strong input cost pressures looks likely to be harder to book, and respondents’ lukewarm assessment of expected profitability in the latest ANZ business survey looks like a plausible view. The operating background for equity performance in sum is modest rather than strongly supportive, and it remains dependent on a reasonably timely emergence from lockdown and the absence of any further COVID-19 surprises.
In Australia, the early results in reporting season were shaping up well, with one notable highlight being Commonwealth Bank’s strong profit performance that supported its AUD $10 billion combination of increased dividend and share buyback. The economy and the equity market were clearly in good shape before the latest COVID-19 outbreak hit.
Although the outbreak has proved to be larger and more widespread than initially expected, so far households, businesses, policymakers, and the equity market itself have been taking a relatively upbeat forward-looking view of business conditions on the other side of lockdowns. Westpac, for example, said the results of the latest (August) Westpac/Melbourne Institute consumer confidence survey, which understandably showed confidence down, were nonetheless “better than might have been expected given virus developments ... The virus situation locally is clearly troubling, but consumers appear reasonably confident that it will come back under control, and that once it does, the economy will see a return to robust growth. The availability of effective COVID vaccines is a key source of support for confidence.”
Similarly, on the business front, National Australia Bank’s July business survey saw confidence and trading conditions weaken, but even so, “With the survey showing a very strong momentum in the leadup to the recent lockdowns, the hope is that once restrictions are eased, the economy will rebound relatively quickly, consistent with the experience through the pandemic to date, and resume a strong growth trajectory – and a return to strong capex and employment plans.”
The RBA, at its August policy meeting, took a similar view. There will be short-term disruption--“The recent outbreaks of the virus are ... interrupting the recovery and GDP is expected to decline in the September quarter”--but beyond that, “The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year. The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery.” The bank is forecasting solid economic growth down the track, and expects Australia “to grow by a little over 4 per cent over 2022 and by around 2½ per cent over 2023.”
The common thought is that there will be a replay of the first episode of COVID-19, where activity returned to normal faster than at first feared, and it is even possible (as the RBA modeled in an upside scenario in its August Statement on Monetary Policy) that anti-virus efforts go better than anticipated. The key risk for investors to monitor is the RBA’s ‘downside’ scenario of more lockdown than currently expected. An ‘upside’ economy where unemployment drops to below 3.5% by the end of 2023 would be congenial for corporate performance; the downside economy, with unemployment is still a bit over 5% in late 2023, would be significantly tougher.
International Fixed Interest — Review
Bond yields remain above where they started the year, and the resulting capital losses have outweighed the typically very low-running yields. The yield on the J.P. Morgan Global Government Bond Index, for example, is only 0.77%. Year to date the Bloomberg Barclays Global Aggregate Bond Index in U.S. dollars has consequently returned a loss of 2.2%; global government bonds are down by 3.4% and global corporate bonds are down by 0.9%. Investors taking on more risk for higher yield have also seen poor returns: emerging-markets debt has returned a loss of 0.2% while high-yield (low credit quality) has returned only 2.1%.
International Fixed Interest — Outlook
The key issue for the sector remains the ultimate strength of inflationary pressures and the extent of central banks’ response to them.
It is clear that now there are strong price pressures across the global economy. The July J.P. Morgan Global Composite Index, for example, found that, “Price pressures remained intense during July, with rates of both input cost and output charge inflation among the steepest in the survey history. Part of the increase in input prices reflected the ongoing disruption across global supply chains.” The big questions that remain are, how long will the COVID-19-linked contribution of supply chain blockages last, and the similar shorter-term capacity pressures caused by a strong V-shaped recovery meeting capacity constraints continue? If current inflationary pressures are temporary, central banks can afford to sit on their hands, and bond investors will be relatively relaxed about inflation eroding the value of their bond yields. But if some of it is permanent, then central banks may have to raise interest rates to restrain it, and bond investors may independently hold out for higher yields to protect their purchasing power.
It would be nice if bondholders could see a clear view on how things will play out, but the reality is that there are respectable views on both sides. The IMF, in its July World Economic Outlook update, ticked the “mostly temporary” box: “Recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches. Inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices, though uncertainty remains high.”
But forecasters are not so sure. The Philadelphia Fed, for example, conducts a long-running quarterly survey of professional forecasters in the U.S., and in the latest (third quarter) survey, forecasters reckon headline inflation in the U.S. will average 2.75% over 2021-25, up from the 2.4% they had expected in the previous survey. They also upped their estimate of PCE, or personal consumption expenditure, inflation (the measure the Fed watches most) to 2.4% from 2.2%. It is also worth noting that some central banks appear to be limbering up for eventual tightening. Various Fed officials have been talking about eventually winding down the Fed’s bond-buying programme, which helps keep yields down. And at its latest policy meeting, the Bank of England, while in the “temporary” camp (“current elevated global and domestic cost pressures will prove transitory”), nonetheless laid out how it would eventually start winding back its own bond-buying.
Futures markets are also beginning to firm up on eventual policy tightening. The U.S. futures markets (going by the Chicago Mercantile Exchange’s FedWatch tool) currently say that it is essentially a 50/50 toss-up that rates at the Fed’s Nov. 2, 2022, meeting will still be where they are today, but the odds shift to a clear 66/34 probability of a rate hike at the Fed’s Dec. 14 meeting. It may not be today or tomorrow, but, assuming the global economy continues to recover robustly from COVID-19, there appears to be progressive upward pressure on bond yields. There is value in bonds’ portfolio insurance role, but as things stand, investors face further capital-loss risks.
International Equities — Review
After a setback in July when the spread of the delta variant of COVID-19 had rattled investors, shares more recently have gone on to new highs. Year to date the MSCI World Index of developed markets in U.S. dollars is up by 16.2%. The U.S. continues to do well (S&P 500 up 19.0%, Nasdaq up 15.0%), but Europe has also had a good year, with the FTSE Eurofirst300 up 19.4%, thanks to strong performance in both of its key economies (France’s CAC is up 24.2% and Germany’s DAX is up 16.5%). In the U.K., the FTSE100 is up 11.1%. Japan remains the laggard, with the Nikkei up only slightly (1.9%) in yen and weaker (down 3.6%) in U.S. dollars. Emerging markets have struggled, and the MSCI Emerging Markets Index in U.S. dollars is marginally down (by 0.8%) year to date. Among the major developing economies, good performance in Russia and India was slightly outweighed by losses in China and Brazil.
International Equities — Outlook
While the world economy’s rate of growth has slowed down a little from the initially very fast pace of the V-shaped rebound out of COVID-19, it remains in strong shape. The latest (July) J.P. Morgan Global Composite indicator of world economic activity suggests the world economy is growing at around a 5% pace, and J.P. Morgan said that “Looking ahead, while global supply constraints and rising cost pressures may provide headwinds, the expansion is likely to maintain a similar course over the months ahead.”
Investors’ attention has mostly been on the U.S., where there have been some very strong data. Forecasters had been expecting good news about new jobs in July--their advance pick had been for 870,000 extra jobs. The actual number came in at 943,000, and the unemployment rate dropped sharply, from 5.9% to 5.4%. Remarkably, there are now more unfilled job openings in the U.S. (10.1 million) than there are people unemployed (9.5 million). But global activity has also increasingly been helped by a sharp recovery in the eurozone--as recent equity gains show, investors are now realising that European business activity has also picked up strongly. IHS Markit’s latest (July) eurozone composite index showed that, “Eurozone business activity rose at its fastest rate in just over 15 years during July, with steep manufacturing output growth complemented by an accelerated expansion of services activity.”
The global recovery looks like it is rolling on into 2022. The latest (late July) World Economic Outlook update from the IMF expects that world GDP will grow by 6.0% this year (the same as the IMF had expected in its previous April update), but 2022 is now looking a bit better than previously thought (4.9% growth expected now, compared with 4.4% in April). One important qualification, though, is that it is a two-tier recovery: “Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: those that can look forward to further normalization of activity later this year (almost all advanced economies) and those that will still face resurgent infections and rising COVID death tolls.”
In these circumstances, equities (at least in the countries that have been better at managing the pandemic) should continue to be able to put good results in the window. As in Australia and New Zealand, companies’ latest operating results are being flattered by the comparison between the V-shape-boosted strong June 2021 quarter and the weak June 2020 quarter of the COVID-19 hit. In the U.S., for example, data company FactSet estimates that for the 91% of S&P 500 companies that have reported June quarter results, profits were up by 89.3% on a year earlier. But looking past the current anomalously high numbers, the outlook looks reasonably good: FactSet’s compilation of brokers’ forecasts for 2022 shows that profits for the S&P 500 companies are expected to increase by 9.4%, and share analysts currently expect the S&P 500 to be 4966.5 in a year’s time, which would be an 11.3% gain on its current level.
The scenario of ongoing recovery from COVID-19 remains contingent on significant uncertainties. There could be upsides: As the IMF points out, there might be better global cooperation on vaccines, and countries currently behind the vaccination curve might catch up. If so, “a sooner-than-anticipated end to the health crisis could lead to a faster-than-expected release of excess savings by households, higher confidence, and more front-loaded investment spending by firms.” And as the V-shaped recovery showed, there is the possibility that global economic activity might indeed prove more resilient than at first thought.
That said, the IMF is probably right is concluding that “downside risks dominate in the near term.” The key one remains COVID-19, given that the global news about the virus continues to get worse. According to the data published by The New York Times, new daily cases reached a temporary low in the second half of June, with some 360,000 cases a day, but have since risen sharply, to around 650,000. As the newspaper commented, “The highly contagious Delta variant, relaxed restrictions and vaccine resistance among a sizeable minority have driven cases sharply higher in wealthy countries with some of the highest vaccination rates.” Israel, one of the notable early successes in quickly moving to high vaccination levels, is currently struggling to contain the latest delta outbreak.
Among nonpandemic risks, beyond the usual unpredictable things like geopolitical risk, the key one appears to be premature or excessive tightening of financial conditions. The IMF’s advice is that central banks should largely look through current price pressures until they can be sure about how much is permanent and how much can be safely ignored. But they might either get the call wrong or be faced with genuinely persistent inflation. Tighter monetary conditions would be bad news all around for asset valuations, but would be particularly painful in markets where valuations are stretched or even frothy. As the IMF delicately put it, we might see “price corrections in segments such as crypto assets trigger
broader sell-offs.”.
Performance periods unless otherwise stated generally refer to periods ended Aug. 13, 2021.
See the Full MorningStar Economic update here.
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