July 2021

Third Quarter 2021

View from the Square

Equity markets posted another healthy quarter to bring the first half of the year to a positive end – boosted this time by gains in growth related sectors, such as healthcare and technology. This meant that leadership came, once again, from the tech heavy US market – with the S&P 500 enjoying a near 10% gain over the quarter. This is in contrast to the more cyclical regions and sectors which fared well in the six months since news of the vaccine last November, but less well in recent months as the pace of growth abates somewhat. What is clear now is that the easy gains in both so called, stay-at-home stocks (e.g. Netflix, Amazon) and re-opening sectors (e.g. travel & leisure, energy) have been made – with returns going forward likely to come from stock selection, favouring active management. 

Investors in the years ahead are going to have to work hard for returns, given the extended level of equity markets in a number of regions and sectors. The job becomes even more challenging when we consider real (inflation adjusted) returns. With inflationary pressures building, it is conceivable that inflation in the UK could average 3% over the next 12-24 months, perhaps higher in the US (which has recently seen the headline CPI index hit 5%). So, investors looking to generate positive returns in the years ahead may be more concerned about the purchasing power (real return) of their wealth, than the absolute increase. With that in mind, this year has seen investors reconsider how to protect their investments against price rises, given that the market’s expectation of future inflation has risen substantially. This is not something that investors have had to concern themselves with for many years, but the COVID crisis has created a potent mix for, at the very least, a significant bout of short-term inflationary pressure – both (pent up) demand and supply (shock) led. 

In order to provide inflation protection in portfolios, investors can look to several areas of the market: Within fixed income, we consider real return assets, such as inflation-linked and floating-rate bonds. For the latter, given that interest rate rises tend to follow inflation, protecting your coupon through floating rate bonds, appears prudent. Assets taking on greater risk, but with historically strong inflation sensitivity, are those such as: Infrastructure, property, commodities and gold. Holding a blend of these assets, alongside traditional equities and fixed income, would likely serve investors well should more sustained inflation pressures take root. It is worth noting, however, that an inflationary range of between 2-4% has historically been a good environment for equities broadly – it is runaway (5%+) inflation that becomes particularly troublesome for stocks, especially those on high valuations.  Therefore, building up protection early through a well-diversified portfolio is how we are positioned into the summer months.

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it may go down as well as up. Interested parties should seek advice from their Investment Adviser. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland SC231678. Registered Office Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9BA.


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