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Global Markets to 4 June 2021

Good numbers… but travel chaos

… and the airline industry is hit hard

In the UK, there is still hope that we are on track for the lifting of all restrictions, but the emergence of the new Indian (Delta) variant has slowed the pace at which the economy is reopening. Nevertheless, the latest UK and US economic data reveals a significant pick-up in activity for many service sector businesses. And in other good news, UK hiring for permanent staff in May hit its fastest rate for 23 years. Furthermore, according to accountants KPMG and the Recruitment and Employment Confederation, growth in temporary staff replacements in the UK have hit a six-year high.

Unfortunately, Portugal is back on the “amber list”: concern has grown over the new variant, sparking huge disappointment among UK holidaymakers hoping to avoid a period of quarantine on their return to the UK from the Iberian Peninsula.

This is yet more bad news for the already ailing airline and travel industries which were banking on travellers being able to head for warmer climes with the lifting of restrictions at the end of June.

The gradual opening of the UK economy has still, however, resulted in some signs of recovery. The Composite Purchasing Managers’ Index (PMI) climbed to 62.9 in May, up from 61.0 in April – and any score above 50 is indicative of an expansion phase. These recent figures are likely to spell good news for the UK economy and an exhilarating GDP growth rate for the second quarter of 2021.

Similarly, business activity numbers in the US service sector are increasing at a record rate: its PMI number for May climbed to a new high of 70.4 (up from 64.7 in April). This was significantly higher than what the market was expecting. The recent US non-farm payroll numbers were slightly underwhelming, however, but were not a disaster. The market has simply shrugged them off and increased its focus on the US economy’s overall recovery.

Europe has seen similar movements in the right direction: its manufacturing PMI number has hit a new record high: factory activity has swelled, and inflationary pressures have started to build. And as confidence in better days ahead have strengthened, a number of European bourses have reached new highs.

Rich nations back deal to tax multinationals

… agreeing to battle tax avoidance by making companies pay more in the countries they do business in

Last week’s G7 meeting saw representatives of the seven member states agree to a 15% global minimum corporate tax on tech giants – particularly those with a strong online presence. These changes will ensure that the corporations in question all pay taxes in the countries in which they operate – not just where they are headquartered. Many of the world’s wealthy nations have struggled for years to agree on a way to raise more revenues from the likes of Google, Amazon and Facebook, all of which have taken advantage of jurisdictions where they pay little or no tax.

Although the corporate tax minimum was less than the 21% that the Biden administration had initially pushed for, US Trade Representative Katherine Tai confirmed that the US was committed to reaching a consensus on international tax issues. This was something of a U-turn for Washington which had previously said that the digital services taxes were “unreasonable” and “discriminatory” against American social media companies, online marketplaces and technology groups.

UK chancellor Rishi Sunak still hailed the deal as it success, adding that it will “make sure that the right companies pay the right tax in the right places”.

Following the announcement, a number of spokespeople representing many of the world’s leading technology giants signified their support for the initiative, and their hope for a balanced and durable accord. The agreement will be considered at a meeting next month of the G20, alongside finance ministers and central bank governors. Needless to say, there is every chance that a number of countries unwilling to raise their corporation tax rates will resist the initiative.

Biden scraps proposed corporate tax hike

… but reaches an accommodation with the Republicans

In a related development, President Biden has offered to scrap his proposed corporate tax hike during negotiations with the Republicans: he is willing to drop a plan to raise the rate to 28% from 21%, and has instead offered to pay for the infrastructure plan by imposing a higher global minimum rate of 15% – in return for the Republicans agreeing to his US$1 trillion infrastructure spending programme. Biden is absolutely determined to implement his green infrastructure plan during his tenure as president.

Covid-19 has caused a global microchip shortage

… and it won’t end anytime soon

Last year’s winning sector was evidently technology. And while we have seen some rotation out of that sector into a wider range of other sectors, a global shortage of microchips resulting from last year’s manufacturing slowdown is creating headaches for companies the world over – everyone from PC builders to dishwasher manufacturers.

Even before the pandemic, the demand for microchips was growing steadily, as products become more sophisticated and technologies such as 5G and the “Internet of Things” become ever more integrated into our world. This led to China calling for “chip independence” as a priority in its recently published five-year plan, while President Biden has proposed a US$50 billion government investment programme for semiconductor manufacturing and research.

While the US still leads the world in microchip design, the manufacturing of semiconductors has largely been outsourced to Asia – China and Japan in particular. In South Korea, for example, companies such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung ship approximately 1.4 billion TSMC-built smartphone processors annually. Samsung, meanwhile, dominates global memory chip production. The automotive industry has also been hit particularly hard and the sudden increase in demand for chips has created an acute demand-over-supply scenario for the industry.

Global equity markets are still strong

… but they’ve undergone a “reconfiguration”

Global equity markets are still rising, but the leadership within the market has changed since the start of the year. While “stay-at-home” sectors – such as technology – enjoyed significant momentum in 2020, the sectors that have skyrocketed this year have been those of a cyclical nature. Energy, industrials, metals and mining, commodities and financials are all on the rampage. And in the UK and the US, small caps have risen dramatically as speculation about an aggressive global economic recovery and a pick-up in inflation have added investment momentum to many of their share prices.

Overall, the momentum for equities remains intact – even though the market leadership has changed slightly. While global equities are still relatively cheap compared with bonds, it will be vital that central bankers make the right decisions at the right time: any errors of judgement in monetary policy could cost financial assets dearly after such a strong rally.

 


Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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