Weekly Investment Update (10/15/2021)

Highlights

• COVID-19: Developed markets positioned to benefit from boosters while emerging market recoveries continue to lag; relative equity returns agree.
• Supply chain: Supply chain issues appearing in company earnings as expected; bottlenecks may begin to fade in upcoming holiday season.  
• Federal Reserve and the U.S. dollar: FOMC minutes suggest tapering starting either in mid-November or mid-December; U.S. rate hikes still far away; U.S. dollar likely to remain stable-to-stronger.

COVID-19 Boosters Supportive for Economic Recovery of Developed Economies While Emerging Economies and Equity Markets Continue to Lag
Given an already limited supply of vaccines, the need for even more vaccine doses for boosters is likely to pose a further threat to the economic recovery of many emerging countries. Some of these countries have not ordered enough doses to cover their populations under a two-dose regimen. Duke University’s Launch & Scale Speedometer has been tracking vaccine purchases by countries since last year. Through October 8, high-income countries, with a total population size of 1.3 billion, have procured nearly seven billion doses. This compares to upper and lower middle-income countries with around 5.5 billion doses procured for about 5.1 billion people. On the other hand, low-income nations have procured 304 million doses for a population of over 1.3 billion people. 

With increased distribution of boosters, developed economies are positioned to continue their economic recoveries. Emerging markets, on the other hand, continue to struggle with vaccine distribution and are relying more on lower-efficacy vaccines such as those from AstraZeneca-University of Oxford, Sinovac, and Johnson & Johnson. We forecasted vaccine inequality to be a problem for the reopening of emerging market economies last year and wrote about this in our Quarterly Investment Perspective, “2021 Outlook: Reopening, Recovery and Growth.” This is one reason that we have remained comfortable with the underweight to emerging markets within the All Equity portfolio allocation that we have had since last year.   

Google Trends Suggest We May Have Passed the Peak of Supply Chain Concerns
According to Bloomberg, “supply chain” has been mentioned roughly 3,000 times in earnings calls this year, surpassing all prior years going back to 2007. In a similar vein, the term “supply chain” is at its peak interest in Google web and news searches over the past five years. Additionally, 15 of the 21 companies that reported last week cited negative impacts of the supply chain on either earnings or revenue. Apple represents a tangible example; Bloomberg reported this week that the company may need to cut fourth-quarter iPhone orders due to supply bottlenecks, despite demand remaining high. 

While media focus on supply chain pressure remains widespread, there are some signs that bottlenecks may dissipate ahead of the holiday season. On Wednesday, the White House announced that the ports of Los Angeles and Long Beach will begin operating 24/7. Importantly, these two ports account for 40% of all containers entering the U.S. In this same speech, President Biden announced that Walmart, Target, Home Depot, FedEx, and UPS, among others, will increase operating hours to meet consumer demand. As supply chain pressure dissipates, so, too, should concerns over corporate earnings and inflation.

Fed Looks to Taper in November, Rate Hikes Further Away; U.S. Dollar to Remain Stable-to-Stronger 
On Wednesday, minutes from the September Federal Open Market Committee (FOMC) meeting showed Fed officials discussed a plan for a $15 billion-a-month taper starting either in mid-November or mid-December, provided that the economy evolves broadly in line with members’ expectations. Most members see the conditions for tapering as either already met or likely to be met soon. Despite near-term tapering, various participants noted that economic conditions were likely to justify keeping interest rates at or near their lower bound over the next couple of years. 

In general, many central banks are slowly reducing the large amounts of liquidity injected into markets back in 2020 and early 2021, including the FOMC, European Central Bank, and the Monetary Authority of Singapore. The combination of tightening global liquidity via expectations for higher interest rates and the divergent recoveries between developed markets and emerging markets suggests that we are likely to experience a stable-to-stronger U.S. dollar in the coming quarters. A stronger U.S. dollar typically equates to weaker emerging market equity performance as dollar strength reduces purchasing power in these markets (via local currency depreciation), one factor in our U.S. overweight.  

Overall, even if the Fed moves to taper later this year, we expect the broader accommodation to remain in place for some time to come. Given current and probable future Fed Board composition, we expect the actual start of rate hikes will skew to the dovish side of the discussion at the Fed. Continued policy stimulus is one of the pillars underpinning our tactical overweight versus strategic targets to equity markets.

 

— Bessemer Investment Team

 

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