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AWML Quick Note: 3Q2021 in Review

Welcome to our third AWML Quick Note. Following a volatile and mostly risk-off quarter in the markets, this letter has a lot of ground to cover. We aim to shed some light on the events that shaped cross-asset returns in the July-September period and explain how they affected clients' portfolios. Let’s dive in.


3Q2021 witnessed a China-led decline in Asian and Emerging Markets Equities, while the US Dollar reigned supreme, and Japan Co outperformed.

Following a very positive first half of the year, global equity markets hit the brakes while geographical diversification proved once again to be a reliable ally for investors. The spectacular implosion of the Chinese Real Estate Conglomerate, Evergrande, which at its peak boasted a market cap of $54billion (currently less than $5billion), raised concerns of a Chinese-equivalent “Lehman moment” and subsequent contagion to the Chinese banking system, with assets in excess of $50trillion, and global markets.

China’s communist party stepped in via its State-Owned Banks and mandated an organised break-up & rescue. Evergrande has total debts outstanding of $300billion, but only $20billion is held by international investors. On the face of it, the situation looks to have been managed but a watching brief is required to ascertain exactly what shape that management takes. Furthermore, inflation fears, supply-chain disruptions, and a stronger US Dollar pressured equity markets. The MSCI Asia ex Japan Index was down ~10% in the quarter while British, European, and American shares ended mostly flat, and Japanese shares shined, ending the quarter up by ~3%.

As it has historically happened during risk-off periods, investors sought the safety of the USD Dollar during the sell-off, and the US Dollar appreciated against the EUR, GBP, and JPY. The US Dollar was one of the few safe havens where investors could hide, as equities, bonds, and real assets (gold, listed real estate and others) declined in tandem.

Fixed Income

Inflation fears were a constant theme throughout 3Q2021, and inflation-hedged assets helped balanced portfolios stay afloat while nominal Sovereign Fixed Income trod water

In previous quarterly reviews, we observed that in the first two quarters of 2021, investors had used nominal (unadjusted for inflation) Sovereign Fixed Income as their personal punching bag, with the asset class displaying some of the worst returns year-to-date, with British and European inflation-protected bonds gaining ~3% while non-inflation-protected declined. Why has this happened?

As the late economist, Milton Friedman brilliantly stated: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. Translated into English: if you print a lot of money very quickly, that money will be worth less. This is precisely what Central Banks did to combat the COVID-19-induced recession, and just like with a good night out, it was all fun while it lasted, but we now must deal with the hangover. We are seeing that hangover manifest itself in the form of higher prices in commodities, wages, food, shipping, fuel, financial assets, you name it.

Yes, some of these prices increases can be attributed to actual supply chain disruptions (semiconductors and shipping are prominent examples). Still, it is no surprise that countries that printed the most money are now witnessing higher inflation rates: in the past few months, inflation readings have been above 5% in the US and around 3% in the UK and Europe. Interestingly, the market’s inflation expectations have not moved much, currently hovering around similar levels to 2Q2021. Is the market telling us that we have seen the peak of inflation?

Forward Returns and Economic Growth

Following years of exceptional stock and bond price appreciation, returns tend to revert close to their long-term average. When? Nobody knows, but it pays to be diversified.

History has repeatedly shown that investors are prone to being the most optimistic about future market conditions close to market highs and the most pessimistic close to market bottoms. This behaviour is rooted in many causes, and most of them are well explained by behavioural economics. If owning a stock is the equivalent to having a claim on future cash flows worth £1,000, one's investment success/failure will rest on if his ability to pay £900, £950 or £1,100 for that stock.

As investing involves risks and is, by definition, uncertain, we recommend more than ever that clients investment portfolios are risk managed by professionals and that the portfolio is diversified across multiple asset classes, within multiple investment markets and preferred economic sectors.
Get in touch with one of our Wealth Managers to learn how to do just that.


Joao Feliciano Martins, ACSI

Wealth Manager



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