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Capital Markets Update: October 2021

Octopus Multi-Manager team1 November 2021

Market updates from October

In a Nutshell

The markets recovered somewhat this month following the more subdued period in September. This was in part off the back of more concrete spending pledges announced by Western governments, as well as an optimistic reaction to the decreasing rates of covid infections in the US, following its third wave peak in September.

Autumn Budget 2021

While not as dramatic as some historic Budgets, the announcements made by Rishi Sunak underlined the Conservative’s continuing “levelling up” message that there would be a shift from austerity driven policy to one of investment.

The announcements made more of an impact on the UK mid-cap sector than blue chip companies. There was simplification and real-terms reduction in alcohol duties, designed to help the hospitality sector recover from the effects of lockdown restrictions, and causing share prices to increase for Wetherspoons (+5.3%), Marston’s (+6.3%), and Mitchells & Butlers (+5.7%).

The construction sector was also buoyed despite the recent squeezes of supply restrictions and increased costs, with pledges including a further funding of £11.5bn into the Affordable Homes Programme, and £5bn towards the removal of unsafe cladding, thereby reducing the costs for property development companies.

There was also a reduction to levies for internal flights announced, which while welcomed by many UK businesses due to airports being large local employers, also attracted criticism from those who had hoped for a greener approach to infrastructure funding, due to the proportionately high level of carbon emissions local flights can generate, and the comparatively restricted funding towards less polluting public transport such as train lines and buses.

Biden’s Balancing Act

The S&P 500 had its best month of 2021 this October, with markets encouraged by the slow but steady progress between Democrats and Republicans in agreeing a future spending agenda, after the debt ceiling was agreed to be lifted, and a firmer picture formed of the likely project funding and taxes due moving forward.

A more compromised picture has developed than originally floated by the Biden administration, with the initial plans to raise corporate tax to 28% being blocked by Republicans and moderate Democrats, but a new ‘surtax’ looking more likely to apply to income for multimillionaires and billionaires, to help raise approximately $2tn in tax, and designed to help pay for their proposed trillion-dollar investments into infrastructure and business.

While the solidifying agreements are unlikely to make either party across the aisle fully satisfied, the markets welcomed the increasing certainty and value of the proposed investment, which while lower than originally hoped by the Democrats, should nevertheless provide substantial help to the US economy.

G20 Rome

The meeting of the G20 (with notable in-person exceptions of Presidents Vladimir Putin and Xi Jinping) took place in Rome at the end of the month, where discussions and announcements included an agreed minimum of global corporation tax, and a pledge to increase distribution of excess vaccines to developing nations.

While there was a fair amount of focus on the British-Franco disagreements over fishing rights, some headway was made in the improvement of US-EU relations, after it was agreed to lift the tariffs imposed on steel and aluminium between the two blocs, which had been put in place by the Trump administration in 2018. This averted an increased tariff on American products to Europe which were due to occur in December.

This move should lower the costs on products such as cars and white goods between the two blocs, but also appears designed to reduce the global reliance on China for steel production, who currently provide more than half of the world’s steel, and whose primary blast furnace method of production is more carbon intensive than the US’s favoured electric arc furnaces.

Looking Ahead

The 31st of October saw the beginning of COP26 in Glasgow, where over 100 countries will meet to present their plans to meet the targets set by the Paris Agreement, with the aim of preventing global temperature increasing by 1.5c+ above pre-industrial levels.

The outcomes of this two-week conference, the perceived readiness of countries to embrace change, and the extent to which the major economies are able to agree and compromise with one another are expected to have profound impact on future expectations for the markets and for the world as a whole.

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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