Quarterly market commentary - September 2021

While it’s human nature to enjoy seeing the value of your investment portfolio increasing quickly, it’s also not reasonable for us to expect large gains each quarter.

In fact, if markets ever get too far ahead of themselves, it could increase the chances of a future correction. In that context, a small positive return can sometimes be more reassuring than a large one. .

Following the extended strong bounce-back from the Covid-19 market crash in March 2020, the recent quarter represented both a consolidation of those prior gains and an opportunity for the market to digest new information.

And what a considerable amount of new information there was to digest.


Chequered pathway back to normal

With much of the developed world having abandoned strategies designed to eliminate Covid-19, and instead opting to “live with it”, there has been a continued reorientation underway globally whereby individuals, businesses and governments are exploring pathways back towards normal, or ‘post-Covid normal’.

Increasingly, this is being reflected in many countries through a relaxation in previous social and business restrictions, and in some cases, travel restrictions.

Unfortunately, on the trade front, the pathway back to normal faces some significant hurdles, at least in the near term. Anyone who has recently tried to buy consumer goods from overseas, will already have a sense of this – shortages and delays are now commonplace – but why is this?

It’s what can happen when an extremely complex system gets disrupted.


Supply chain breakdown

During the first half of 2020, when much of the global economy went into lockdown, demand for most consumer goods came to a near standstill. In short order, manufacturing capacity was cut, sailings by container ships were cancelled, and workers everywhere were furloughed or displaced.

By the second half of 2020, following massive fiscal and monetary stimulus by most central banks, consumers started flooding online retailers with new orders. Manufacturing restarted and international trade resumed. The global economic switch was suddenly turned back on.

Unfortunately, restarting the global manufacturing machine after the lockdown turned out to be anything but seamless. The vast and interconnected system that continuously moves raw materials and finished products all around the globe requires predictability and precision. But with the advent of Covid-19, both had been lost. And, when the switch did turn back on, it occurred when thousands of shipping containers were stuck in the wrong place.

Many containers that carried millions of protective face masks to Africa and South America early in the pandemic today remain empty and uncollected because shipping companies, aiming to make up for lost time and lost profitability, decided to direct their vessels towards their most profitable routes between Asia and North America or Europe.

With significantly fewer containers suddenly in circulation, this resulted in an immediate imbalance between the supply and demand for usable shipping space. Unfortunately, it is this global supply chain breakdown that is directly contributing to the spike in transportation costs we are now witnessing, as well shortages in key manufacturing components, order backlogs and frustrating delivery delays. Perhaps most obvious of all, we are seeing these effects coalesce all around us in the form of rising consumer prices.


Inflation – temporary or permanent?

And that leads to the question that policymakers and market participants are now grappling with – are these price rises likely to be temporary or something more permanent?

Inflation measures have certainly gone up but that only reflects what we already know – that many prices have already increased. It doesn’t tell us how persistent those price rises may prove to be. In fact, if recent price rises can largely be attributed to supply chain issues, which are likely to be remedied in time, then the idea that the current inflation spike will only be temporary may have more credence.


Interest rate uncertainty

Although many of the current inflationary forces are still seen as transitory, persistent disruptions in supply chains and surging energy costs in some regions has fuelled fears that inflation might last longer than initially anticipated.

In the US, Federal Reserve Chairman Jerome Powell said they anticipate the current surge in prices, due primarily to supply chain bottlenecks, continuing into next year before fading. He said the Federal Reserve does not expect the current inflation spike to “lead to a new inflation regime, in which inflation remains high year after year.”

With reported inflation rising, so too is the pressure on interest rates. However, central bankers everywhere are also mindful that raising interest rates might not just signal their commitment to keeping longer term inflation in check, it might also threaten the recovery of the fragile global economy.

The world continues to watch developments in this space with keen interest.


But . . . not all doom and gloom

On the surface – where the media tends to search for headlines – the new information presented during the quarter seemed rather negative. It might be one explanation as to why returns during the quarter were fairly flat. However, when you scratched a little deeper, there was often better news to be found.

Globally, most countries have successfully reduced the spread of the highly infectious delta strain, via a combination of vaccines and increased mobility restrictions. And, with global vaccination rates still climbing, there is a sense of the tide slowly turning in this global fight. It is far from an immediate salve but is a brighter light at the end of the tunnel.

On this pathway towards greater personal and economic freedoms, we can begin to consider the impact this might have on trade, business profitability and economic prosperity. Taken together, the International Monetary Fund and World Bank see an average global growth rate next year of 4.6%. This may be a touch below the current growth rate, but it is still a very healthy rate of annual growth for the world economy relative to its pre-Covid pace of around 3%.

A global reopening with increasing vaccination rates may also help reduce inflation pressures as the business community consistently gets back to work. Earnings volatility should reduce as supply chain pressures ease and businesses incur less of the stop/start disruptions they have experienced with respect to operations and earnings. And while global interest rates may have commenced an upward path, they are likely to remain highly attractive (by historical standards) for quite some time, providing a significant ongoing support to share markets.

Covid-19 will go down in history as a global health disaster and an extraordinary economic disrupter. It is rare that the world is so utterly unprepared for something so seismic. But, while its health impact and implications may linger long into the future, its long term economic impact – in aggregate – may be considerably less devastating.



For a detailed review of the asset class performances for the quarter, see ‘Key market movements’ or click here to view the full newsletter in PDF.



Information contained in this newsletter does not constitute personalised financial advice because it does not take into account your individual circumstances or objectives. You should carefully consider whether the Synergy investment portfolios are appropriate for you, read the applicable offer documentation, and seek appropriate professional advice before making any investment decision. The information in this newsletter is of a general nature only. Investors should be aware that the future performance of the Synergy investment portfolios may differ from historic performance. Details are correct as at the date of preparation and are subject to change. The investment objectives and strategies of the Synergy investment portfolios may change in the future.

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