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Capital Markets Update: July 2021

Octopus8 August 2021

Market updates from July

In a Nutshell

This month we saw the continued recovery of the UK, European, and US economies, off the back of the increasingly successful rollout of vaccines, monetary and fiscal support, and the relaxation of covid protection measures.

In converse there was a fall in Asian markets following a further crackdown by China on the technology and education sectors, and bond yields reached record lows, as many investors remain cautious over long-term growth expectations, beyond the perceived bounce-back.

UK Retail’s Recovery

Following June, the UK retail and service sectors continued their recovery, with shops, bars, and restaurants being fully open, and many consumers spending cash which had accumulated during lockdown. This was further buoyed by the increasingly warm weather, the uptake UK-based holidays, and the success of the England team in Euro 2020.

As the month continued however a more mixed picture has developed. The CBI’s monthly survey indicated the influx in demand has been increasingly difficult to meet as supply lines have become disrupted, with expected sales across the distribution sector hitting the lowest point since 1983.

The shortage is in part due to the ongoing issues and delays at UK ports as a result of Brexit, but further exacerbated by the ‘pingdemic’, where staff for warehouses and haulers have been told to isolate, causing widespread labour shortages. The CBI expects low stock levels into the Autumn, which may temper the recent gains made by retailers.

Global Minimum Tax

A further step towards a global minimum corporate tax rate was taken, after the G7’s agreement to a rate of at least 15% in June was rolled out to include a total of 130 countries. This included the BRIC economies, as well as traditional tax havens such as the Cayman Islands and Gibraltar, for a total of 90% of the global economy.

If successful, the measures would hinder the ability of international companies to have profits taxed in nations with lower rates. This could particularly affect the activities of tech giants, who until now have taken advantage of more favourable jurisdictions by ‘profit shifting’ to reduce the impact of tax on their businesses.

A number of exemptions have been proposed, including shipping, financial services, and commodities, however technology companies such as Google, Amazon, and Apple are to be specifically targeted in this framework. The aim is for these changes to be enacted by 2023, and the OECD expects that if rolled out then approximately £73bn could be raised by curbing profit shifting, and a further £110bn from raising the global minimum rate, although it remains to be seen if these proposals can be put into law by each respective country.

Chinese Crackdown

Asian markets were heavily affected this month by the increased crackdown from Beijing on the technology and education sectors, and speculation over future sectors to be in their sights.

China’s announcements involved tightening rules for Chinese companies to be listed overseas, or to allow foreign investment, as well as curtailing the business of those already publicly listed. Big casualties of this included Alibaba and Tencent, and the recently listed ride-hailing app, Didi, plunged from its share price high of $16.40 to $8.04 over a couple of weeks.

The Chinese education sector has received billions in global investment in recent years, being viewed as a lucrative market due to their highly competitive education system. However, concerns over education becoming increasingly less affordable, and in turn affecting people’s decisions to have children, has led to the government announcing wide scale restrictions on how private educational services may operate.

Following the subsequent decrease in investor sentiment, China has since attempted to allay these concerns by telling brokerages not to ‘over interpret’ its actions, explaining that Chinese firms could still list in the US as long as they met the right requirements. This resulted in a slight recovery toward the end of the month, however this nevertheless highlighted concerns to foreign investors when looking at other lucrative sectors, such as housing, which may also be affected in future, given the apparant willingness for Beijing to restrict outsider investment.

Looking Ahead

Despite the promising growth which has developed in recent months, for the time being the markets will be heavily subject to confidence over the effectiveness of vaccines, and the success of the continuing global roll out. As data accumulates and further evidence comes to light from vaccine manufacturers over the efficacy against new variations, we will expect the markets to respond accordingly.

What will be of interest ahead is whether the recovery plans of developed economies, such as for the US (the “American Jobs Plan”) and the EU (“Next Generation” fund) are successfully adopted and rolled out, along with the even more ambitious, but nebulous plans of a “Green New Deal”, and the “Build Back Better” proposals.

If successfully implemented, we could see a breakaway from the austerity driven models we have seen for over a decade, and with it potentially higher growth and development. However, given the increasingly polarised political landscape we are seeing across legislators at present, these grand plans may fail to take off effectively, in which case the road to recovery may take much longer.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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