Economic recovery continues, but more slowly
There was a surge in economic activity over the spring and summer, reflecting the opening of the economy and pent-up demand from earlier lockdowns. However, following the economic rebound there are now signs that the recovery in the world’s major economies is decelerating somewhat. The Delta variant risks slowing the pace of economic growth, while economies are now normalising towards pre-pandemic levels. Although the balance of risks is no longer skewed towards the upside and is now symmetric, our cycle indicator still points towards expansion.

While we do expect some ‘speedbumps’ along the way with occasional virus waves, vaccines and system adaptability should mitigate any effects on the economy. Therefore, we would describe these risks as moderate. Given the strong jobs market and potential inflation risks, we expect the Federal Reserve to announce later in the year that it will taper its asset purchases, which should put some upward pressure on long-term bond yields.

The recent correction in Chinese assets left global markets largely unscathed. Global equity prices continued to rise, supported by another strong corporate earnings season, persistently low yields and solid economic data. We expect this supportive backdrop to persist and keep our risk-on positioning.

Global assets, especially US equities, continued to perform well over the past month, but the correction in Chinese and Asian markets has opened select investment opportunities. While we think it is too early to ‘buy the dip’ in Chinese equities, we find the attractiveness of Asian high yield bonds has increased, as average spreads widened to the widest levels since late-2020.

While single weaker issuers, especially within the important Chinese property sector, can still lead to phases of volatility, we think a too dire outcome is currently priced into Asian high yield bonds. We therefore have increased out tactical overweight.

Restrictions in both in the US and throughout Europe continue to be eased, increasing mobility to almost pre-pandemic levels for most people. The UK economy has now seen most of its major restrictions lifted, making it a test case for the rest of the world. Although cases are now rising, hospital admissions have been falling and are a fraction of what they were earlier in the pandemic.

As the pace of vaccination growth eventually slows, many countries are now looking at offering incentives to encourage people to get vaccinated. Even though local setbacks are possible if infections rise further, this vaccine push should help lift the remaining restrictions to give people and firms the same levels of freedom they had before the pandemic. However, while the vaccines are clearly working, the highly transmissible Delta variant is fuelling a surge in cases, so there is still some way to go before we can put the pandemic behind us.

As the Delta variant continues to spread, new cases are on the rise globally. However, the occupation of intensive care units (ICUs) and fatalities have clearly decoupled from the latest infection trend, mainly due to the successful rollout of the vaccine in North America, Europe and China. Going forward, extra vaccines will need to be shipped to emerging markets to avoid derailing the economic recovery. Fortunately, we see some signs that vaccine shipment is gaining momentum. People, large and small firms, and governments have all adapted and are now handling the virus in more effective ways. This suggests that the economic impact of this fourth virus wave is likely to be more manageable and a lesser market risk.

As the vaccine rollout turns to younger age groups, the journey back to normality continues with the further easing of restrictions. Thanks to the success of the vaccination programme, things are finally opening up and the release of savings built up over the lockdowns is set to lead to a spending boom. People are enjoying the opportunity to finally spend some of their lockdown savings on holidays, entertainment and in shops and restaurants. The back-to-school shopping season is also expected to provide a well-needed boost to the high street as shoppers seek to make up for lost time.

Understandably, some investors worry that we could see a surge in infections which could slow the economic rebound if we are not careful. As we enter autumn, experts are warning infections could rise further now that rules have been relaxed. Case numbers still remain quite high and there is the potential for extra pick-up now that children are returning to school and workers are going back to offices. The good news is that, despite the continuing spread of the Delta variant, vaccination rates are now higher and people and companies have adapted to cope with the virus risks. The recovery remains on track and we are optimistic about future growth.

Vaccines are mitigating the impact of the Delta variant on the economy

Variants of delta

COUNTERPOINT
SEPTEMBER 2021