Federated Hermes Market Analysis

The growth slowdown in China intensified in Q3, largely reflecting the impact from the delta variant on activity and stress in the property market.

Investor Relations Specialist

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The bout of investor nervousness has proven transitory, even as inflationary signals persist. Equity markets are back on the rise as investors shrug off their recent concerns, with major indices near all-time highs. The growth slowdown in China intensified in Q3, largely reflecting the impact from the delta variant on activity and stress in the property market.

Eoin Murray, Head of Investment, at the international business of Federated Hermes

The UK govt has had a busy week – hot on the heels of their ‘Green Finance Roadmap’ came the highly-anticipated ‘Net-Zero Strategy’.  The Roadmap provides significant additional policy details on many relevant areas of sustainable finance, with a major focus on the Sustainability Disclosure Requirements regime, intended to improve the flow of information across the economy, most notably from corporates to financial services firms.  Whilst an excellent start, aspects of the Roadmap will not go far enough for some – I can imagine the disappointment over ‘comply or explain’ rather than ‘mandatory’ obligations. 

The Strategy picks up the mantle setting out policy proposals and pathways for indicative carbon emissions reductions for different sectors of the economy, covering transport, heat and buildings, power, agriculture, amongst others.  In essence it is the details behind the 2050 net zero objective and the 2030 NDC commitments.  Both are to be welcomed – they are a good start.  But also just a start.

Geir Lode, Head of Global Equities, at the international business of Federated Hermes

The bout of investor nervousness has proven transitory, even as inflationary signals persist. Equity markets are back on the rise as investors shrug off their recent concerns, with major indices near all-time highs. Earnings season is now underway in the US and while it is early days the initial flurry of earnings have been well received. The supply squeeze combined with increased demand is particularly challenging, but blue-chip companies that can prove their ability to maintain profitability in an inflationary environment are likely to be well rewarded. 

Our proprietary risk aversion indicator corroborates this change in investor sentiment. However inflation expectations have not fallen – if anything the argument for transitory inflation has weakened in recent days – and interest rate decisions loom. Investors will be watching the Fed and the BOE closely. We anticipate investor sentiment to remain volatile and advocate for a diversified approach to help weather any potential storms. 

COP26 will help to refocus investors on the importance of sustainability. Many sustainable investments have proven volatile this year, however there is an undeniable urgency to tackle climate change and biodiversity loss: these long-term themes continue to represent exceptional market opportunities regardless of short-term performance. Investor patience will be virtuous in this environment.

Silvia Dall’Angelo, Senior Economist, at the international business of Federated Hermes

Concerns about the growth outlook for China and its ailing property market, persistent supply constraints and high inflation have remained front and centre this week, while the Q3 earnings season kicked off.

The growth slowdown in China intensified in Q3, largely reflecting the impact from the delta variant on activity and stress in the property market. China GDP growth came in at 4.9%yoy in Q3, down from 7.9% in Q2, but still on track to exceed the government’s target of ‘above 6%’ for this year. Headwinds will likely persist in the last quarter of the year, as the situation of the property market has remained fragile, while the gas crisis has also emerged as a new drag. Policy support is likely to be measured and targeted going forward as authorities are aiming for more balanced economic growth.

Inflation numbers for September remained elevated across the board, although there were signs of a temporary respite. Indeed, the inflation picture is set to get worse in the short term before it starts improving. The current gas crisis in Europe and recent increases in energy commodity prices more generally imply that inflation will continue to climb in winter months. Base effects, a likely moderation in commodity prices and a gradual easing of supply constraints should drive inflation down starting in the Spring of next year. Granted, the longer realised inflation remains elevated, the higher the risk it becomes embedded via expectations and/or wage formation processes. For this reason, developments in labour markets – still hard to interpret due to lingering Covid-related distortions – will be crucial.

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Federated Hermes Market Analysis