The rapid return of geopolitical risk did little to move the spotlight away from the evolving COVID-19 pandemic. While it is likely that Afghanistan will see significant instability in the coming months, the biggest risk to investors remains the virus.
The key to economic recovery will be the reopening of economies and there is a persistency about the Delta variant that sees global cases climbing, particularly in places where vaccination rates are low. This will hamper attempts to keep economies open and recent data has seen a slowdown in consumer spending. Sentiment is likely to worsen over the coming weeks as we see children return to schools and employees returning to work.
While this may read as a gloomy outlook, a market correction has been overdue with indices hitting record highs over the past weeks. There remains sufficient liquidity in markets to soften any potential impact, as fear continues to dominate market sentiment. That is why central banks are being particularly cautious in their commentary about reducing monetary measures, as the echoes of the overly aggressive policy tightening in 2013 and 2018 are fresh in the mind of investors.
This made the minutes from the Federal Reserve’s Open Market Committee (FOMC) even more timely, as they corroborated what the Chairman Jerome Powell had already confirmed in his press conference three weeks ago. Tapering of asset purchases had been discussed in detail and quantitative easing is ready to be deployed when the time is judged to be correct.
This timing is critical, and it was fully expected that at the annual Economic Symposium at Jackson Hole this week, there would be a signal of when tapering would commence. This would then be followed by a formal decision from the FOMC in the fourth quarter, with potential easing being implemented in early 2022.
However, the meeting on Friday has now been changed to a virtual event as the risk of COVD-19 has been escalated to ‘high’. The Chairman of the Federal Reserve has always reiterated that the path of the US economy, and ultimately the unwinding of the emergency monetary measures, would depend on the course of the virus. The change from the Jackson Hole meeting from real to virtual is a reminder of the biggest risk factor to our investment decisions remains COVID-19.
It also justifies our tactical asset allocation decision in remaining neutral to equities since we moved from underweight at the bottom of the markets in April 2020. We always expected increased volatility through this phase, as policymakers navigated away from emergency conditions and interpreted conflicting data. We remain confident that 2021 will be a year where we post positive returns and look towards 2022 where change will actually be implemented.