HAMISH MCRAE: Bumpy months ahead for shares

It is a grumpy, ill-tempered autumn, and it is going to get grumpier yet. The reasons are obvious. The supply chain glitches have yet to feed right through the system, and the inflation they generate will hit all of us. 

The world economy will eventually emerge from the ructions, but the return to calmer conditions may be many months away. 

Meanwhile, we will pay more for everything. Look what is happening to energy costs. China is scooping up gas supplies to keep its economy going, with the result that there has been a five-fold rise in its global price. Some of that increase will appear on our fuel bills this winter. 

The ill temper is evident in the markets. We are into October, always a dangerous month for global equities. Some of us remember the crash of October 19, 1987, when the Dow Jones fell by more than 22 per cent, its largest ever one-day decline.

I don’t think we are heading into quite that territory, but I see Morgan Stanley has warned that there is a growing risk of a 20 per cent fall in the S&P500. The boffins at Goldman Sachs and Citigroup have also written, in slightly less bearish language, about the possibility of some sort of negative shock for share prices. As always, a plunge in New York would hit share prices just about everywhere in the world. 

What is beyond dispute is that we will be pushing our way against some tough headwinds in the weeks ahead. One of those is the global view of the UK economy. The negative image post-Brexit had faded a little, and the most recent ONS data shows that the country has not performed that badly through the pandemic compared with the other G7 nations. 

But a few pictures of queues at the fuel stations flashed round the world knock the image of a country that is sorting itself out. One indicator of what global investors think of our Government’s competence is sterling. A month ago it was trading at $1.39. Last Wednesday, it went down to $1.34, an eight-month low. Our Government has to lift its game. 

Another headwind is uncertainty about the way our economy will respond to the ending of the furlough scheme, with almost one million people still on it. 

There are plenty of jobs. There is an all-time record of 1.25million unfilled vacancies. But there is a mismatch. If your skill is organising foreign holidays in a travel agency, it is tough to try to retrain as an HGV driver. What looks fine from a macro-economic perspective does not look at all fine when you look at the detail. 

But I think the strongest headwinds are international, not domestic. It has taken them a while, but global investors are coming to terms with the probability that inflation will be higher for longer than they were led to expect by the central banks. So bond yields will rise. Last week, the ten-year gilt yield climbed above 1 per cent for the first time since March last year. US ten-year treasuries were above 1.5 per cent. I think those yields are far too low. Investors are still soothed by the idea that the central banks will hold rates low for many months to come. 

But there is a shift. The heady atmosphere of last spring has been blown away. Take as a yardstick the boom in New York in creating special purpose acquisition companies, or SPACs. The idea with these is that sponsors launch a new publicly quoted company to buy other enterprises – without saying anything about what it might do with the money. Investors are giving them a blank cheque. 

Now the Securities and Exchange Commission, the US regulator, has started to crack down, making it tougher to raise money. The number of SPACs has fallen. There were nearly 300 in the first quarter of this year, but only 79 in the past three months. So what happens next? There will, I expect, be some sort of equity correction, starting in the US and then spreading across the developed world. That is what the top New York strategists seem to be expecting, and the very fact they are doing so makes it more likely that it will happen. 

If it does, London gets caught too – though the fact that UK assets are already unfashionable may paradoxically limit the downside for us. However, the central banks will keep interest rates low for as long as they dare, and if that results in yet higher inflation, then the shares of solid companies will give investors some protection. 

So a bumpy autumn lies ahead, but the world economy will keep growing. We are still in the early stages of the global economic cycle and that will drive share prices for some while yet.