As we look towards the second half of 2021, after a strong first half of the year in many financial markets, we focus here on what we believe could be the 3 main impactors when it comes to your money and your investments.
The leading financial markets around the world and the largest stock markets, have performed strongly, and perhaps better than many expected in the first half of 2021. If you are invested with a diversified or growth focus, you may have seen that reflected in your portfolios and pension accounts. The bond or fixed interest component of portfolios has been more volatile and residential property in many cities across Europe and around the world has grown strongly, due to the pandemic effect.
But what’s in store for the rest of the year? Here, we look at the data, the markets and the projections to make sense of what we might be able to expect for the rest of 2021, and what it means for your investments.
Inflation is increasing. For the last several years, inflation has been low, with downward pressure. Governments and central banks have been holding inflation low to control costs, wage increases and to keep economies competitive. Since substantial amounts of money were pumped into markets last year when economies shut down due to the coronavirus pandemic, as markets open again this year, so this has placed more pressure on inflation. Simply put inflation is trending higher because more money is circulating.
The big question is whether this inflation increase is temporary as we adjust from economies being closed to open again, or if it is more cyclical, meaning it may stick around for longer. We will have clarity on that question later in the year.
We consider inflation to be a higher risk for investors than market volatility. This has application in two ways: first, if you are holding your wealth in cash, you will be receiving zero or maybe even, negative interest rates. As inflation increases, your purchasing power decreases fast and your wealth goes backwards by the rate of inflation. Interest rates, mortgages, cost of living, oil prices all increase as inflation increases.
The second way it impacts is that your future cost of living needs increase and so you need to make sure you are keeping pace with this increase in the form of returns on your investment.
2. Stock markets
As we mentioned at the top of the article, world stock markets had had a strong first half of 2021. What we are seeing now is a potential divergence again between non-cyclical dividend paying stocks and discretionary cyclical shares. Shares that are considered cyclical, meaning their price is more subject to market and economic cycles, have shown more volatility and their performance is expected to be more closely related to expectations of the world economy. This group includes airline stocks and shares in travel and leisure companies.
The other pressure on shares is geo-political. Frictions between countries and restrictions to free trade could impact stock markets as we are seeing in some countries.
The third factor we see is the continuing strengthening of investments that have an ESG (an environmental, social and governance) focus.
Yes, it is still impacting markets and economies. The latest stock market uncertainties are directly related to concerns about the spread of the Delta variant. It has become a way of life with the coronavirus impacting and changing how we live, work and socialise in so many ways. It will also continue to impact the financial markets and therefore your investments. If there is concern about the control of the Delta variant, or in the future some other variant, that may force countries and markets to close down again, investment confidence will deteriorate and markets may slow down or reduce.
The other side of the scale is the global vaccination programme that continues. As more people in more countries become fully vaccinated, it provides confidence to financial markets as it means people will be able to more freely work, travel and live in an unrestricted way. This can boost markets.
What you should do
Our experience over 25 years tells us that there are always short term factors influencing financial markets. It is a reality that if markets are going up, at some stage they will fall, and if they are dropping, at some stage they will recover. This is short term cyclical volatility. More important though, is that whilst markets go up and down, in the long term they trend upwards., meaning if you smooth out the short term fluctuations markets will increase in value over the long term.
Therefore, our recommendations are:
- Be aware of the short term market influences and speak with your adviser about what impact they may be having or opportunity they might present;
- Don’t be reactive to every change in the markets;
- Remember your long term goals. The most important question is to see if your investment is still relevant to your goals and whether you are still on track.
In short, focus on the long term, adjust if necessary, and ignore the day to day noise.