UK Equity market update: Q3 2021

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Equity markets made modest progress over the period as the focus turned to China. At the macroeconomic level, investors focused on the perceived shift in Chinese policy with a renewed emphasis from President Xi Jinping on ‘common prosperity’ and the likelihood of redistributive effects on sectors, companies and individuals. At a lower level, markets also worried about the future of Evergrande, a Chinese property developer, and the risks of its financial failure triggering systemic effects. Inflation and supply chain pressures remained ever present, not only in the UK where drivers queued for fuel but more widely as the rebound in activity stretched logistics capabilities. The oil price continued to recover as stronger demand met only modest OPEC increases and a lack of new supply reflecting recent capex constraints.

Earnings momentum has been very positive during 2021, led by the Energy and Financials sectors, as economies emerge from the worst of the pandemic effects. Defensive sectors, such as Staples and Telecoms, that have only met expectations, as opposed to delivering upgrades have been notable laggards. Within the Resources sector there was significant divergence between Oil & Gas and Mining with the underlying commodity prices moving in opposite directions; most notably, the iron ore price has now halved from its May peak reflecting worries about Chinese steel demand.

The headwinds discussed above created a challenging environment for strategies across the UK Equity Team during the quarter. Exposure to the mining sector was a notable detractor to portfolios and given the strong rebound in the market year to date, it became clear that companies meeting rather than beating expectations was not enough to sustain current valuations and these shares suffered. Conversely companies that have shown a strong recovery from pandemic impacts, coupled with accelerating growth rates, saw their share prices rewarded and bucked the trend of the falling market.