A western alternative to belt and road and expected rate rise

18 June 2021

The noise

  • The Federal Reserve expects to raise interest rates a year earlier than expected, according to economic projections released on Wednesday. These announcements come in the wake of strong economic forecasts predicting growth of 7% in 2021 and 3.3% in 2022. The unemployment rate is also expected to fall to 3.8% by the end of 2022 and 5.8% by the end of May.

  • Following the three day G7 conference, Joe Biden challenged his heads of state counterparts to counter China’s rising influence by flexing their financial muscles. Biden declared that western democracies were “in contest with autocrats” and that the West should offer a package to compete with the Chinese “Belt and Road Initiative”.

  • Due to rising coronavirus cases, lockdown measures have been extended for an additional four weeks in England. Rishi Sunak has also ruled out any further extension to support for businesses at this time, claiming that support measures put in place in March were generous enough and had considered the possibility of an extended lockdown.

The numbers


The nuance

The last months have taught us that market sentiment can hinge on the smallest miscue. A pause, redundant adverb or glance in the wrong direction can send the market into a frenzy. These days, Federal Reserve announcements are as much about stage management as they are hard economic policy and Wednesday’s meeting was no different. At the end of the two-day meeting, the US central bank kept its main interest rate at the very bottom of the range from 0 to 0.25%.

Investors increasingly believe that rates will rise in 2023, as they question the transitory nature of the inflation combined with a belief in a fuller and faster economic recovery.  The market spluttered as it focused on a handful of regional governors indicating that they also thought rates might rise in 2023.  However, those listening to the press conference with Jerome Powell would realise he was at pains to highlight the changes in the FED’s policy framework.  It seems that investors and these regional governors have not fully understood the increased importance to Mr Powell of ensuring full and inclusive employment, nor his unwavering conviction in the transitory nature of the current inflation surge.

Government deficits and extremely low interest rates have allowed people to lay claim to a limited supply of goods, and supported prices during the recession.  It remains to be seen if the production and flow of goods can increase enough to tame the current inflation levels.  Although the balance of growth and inflation is uncertain, the backdrop for corporate earnings remains constructive, there are still no discussions around reducing the current level of FED asset purchases, and as seen over the last 10 years, interest rate hikes have a way of being pushed out as time marches on as central banks are ever fearful that they might disrupt the party.  The odd market wobble on the vaguest possibility of a rate hike will only serve to amplify that fear.  Our portfolio continues to hold excellent businesses with risks balanced and diversified that we believe have room to grow and deliver incredible value for our investors.

Quote of the week

Ziona Chana had 39 wives, 94 children and 33 grandchildren - all of whom lived together in a four-storey pink house - Sky News

Imagine that feeling of dread and anticipation around Christmas time when a procession of aunts, uncles and grandparents are about to walk through the door and turn your house into a bombsite. The endless dirty dishes, fresh towels required and family feuds can happen to the best of us, just ask the royals, but to think of the carnage in this man’s home really does boggle the mind. The logistics involved would require a whole team of assistants and god knows the state of the hand-me-down clothing once it finally reaches the end of the line. In any case, we’re sure that a Sanlam Wealth Planner would be happy to break down the intricacies of the IHT case involved… 

Source: news.sky.com

Phil Smeaton
Chief Investment Officer

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

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