Mark Richards, Strategist and Fund Manager, Multi-Asset, looks at the outlook for growth in the US after a soft Q3, and addresses the equity market implications for higher commodity prices.
The third quarter of 2021 was a soft patch for growth in the US, but there are already signs of a pick up in activity (seen in footfall, use of public transit, airline/hotel bookings), while Delta cases of Covid are down a third from their peak in the US. This supports our view that the coming months should see a rebound in US growth; the September payroll print might come too early, but during Q4 we expect to see improved macro data.
Survey results are showing that consumer willingness to make big ticket purchases, such as a car or a house, has gone down as inflation rises. Our view is that higher prices are very much supply driven, though. Taking US autos as an example, inventories are at about 10% of a typical mid-cycle level but production is slated to go up in Q4, so we see the production bottleneck easing into Q1 2022.
Outside of the US, we’ve been focusing on Asian economies that might be small on a global scale but nevertheless play an important role in international supply chains. Vietnam and Thailand, for example, are now vaccinating at a faster rate than either the US or UK did in the spring and we think that will ease manufacturing supply chain issues into next year.
Commodity prices and energy are the big spanner in the works at the moment. Coal inventories in China are at a record low, and relative to output are at about 10%-20% of a normal mid-cycle level. The Chinese government are now encouraging banks to help fund energy and power generation companies, but that won’t do anything about the low level of coal inventories. The welcomed desire to move to greener sources of energy may have come too quick relative to the required behaviour changes and lack of investment in dirty energy sources. We think high commodity prices are here to stay, particular in gas, coal and oil. There has been a lack of investment in oil production for many years that is now coming to a head, with supply responses from US shale or OPEC+ likely to be in line with demand at best.
During the upcoming Q3 reporting season it will be interesting to hear how companies plan to pass through higher input costs. Up until mid-September survey data across consumer staples, retail and manufacturing showed high levels of management confidence that they could pass through higher costs, but that confidence is waning now.
On policy, it was clear from the last Federal Reserve meeting that they are determined to taper in November. If we’re right on the lifting activity in the US economy, at a time when inflation appears more resilient than some anticipated it would be, that could create a hawkish risk and push the discount rate for US growth equities up. Valuations may have already come down from their peak, but still sit above pre-Covid levels. That leads us to be marginally underweight on US equities, with an accompanying increase in appetite other developed market equities, as well as a stronger preference for long USD exposure that keeps us fairly reticent about emerging markets for now.
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