The central story in June continued to be US inflation, where high levels reported in April (4.2%) were exceeded in May (5.0%) and again in June (5.4%, reported in July). Looking under the bonnet at the components driving higher inflation, we find second hand car purchases, vehicle insurance, hotels, air fares and restaurants. As such, we remain convinced that although we could see high levels persist for several months, ultimately excess demand and pricing pressures for items such as these will subside and hence inflation will prove transitory. As mentioned previously however, in the longer term we think there is now a better balance between disinflationary and inflationary forces and so we remain alert to the alternative scenario where pricing pressures become more broad based.
One of the potential drivers of higher inflation in the long term, which I wrote about last month, is tackling climate. In June, we saw the first issue from the NextGenerationEU fund that is targeting huge investments into green and digital infrastructure. With global infrastructure spending plans picking up, we could see a surge in demand for raw materials required to electrify everything.
But, with the market buying into the transitory inflation hypothesis for now, longer term growth themes such as technology have started to outperform in the US again. In China, we are seeing quite the reverse of fortunes with a growing headwind for a hitherto lightly regulated sector. Perhaps China has been a bit more heavy handed, but the US, UK and Europe have been increasingly focused on the strategic value of “data”, as collected by technology companies. In the long term, we think the strategic importance of such companies remains but we could see their spheres of activity curtailed along geopolitical fault lines.
Finally, the delta variant is fast becoming the dominant strain in a number of places, famously India and the UK. As we know, the UK delayed its reopening by a month in an attempt to increase the vaccine shield. With other countries being further behind in their vaccination programmes, we may see more cautious responses to increasing case numbers outside the UK. Indeed, it poses a substantial threat to the otherwise rosy picture of the gradual economic restart, especially for the global hospitality sector. As I’ve written previously, while life may return to some sense of normalcy in specific developed markets, it could be a long time yet before we fully open up the gates to international travel.
You can find further information on our blog and the Strategy Insight sections of our website. Portfolio factsheets to 30 June 2021 are available here.
As always, please do get in touch with any questions or feedback.
Kasim Zafar, CFA
Chief Investment Strategist, Investment Manager