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Capital Markets Update: September 2021

Octopus Multi-Manager team30 September 2021

Market updates from September

In a Nutshell

September is historically a subdued month for stock markets, and this year was no exception, with most of the major indices receding. An exception to this was Japan’s Nikkei 225, which rose in response to the prospect of increased government stimulus, and producers within the energy sector, which benefitted from the recent rise in wholesale gas and electricity prices.

UK and other global markets had a more difficult time, with utility providers, industrial, and manufacturing sectors taking the brunt, as base costs continued to rise, and supply chains remained stretched.

Power Outage

Dominating the UK news was the increased costs of electricity and gas. The reasons for this varied from our reduced reserves, lower than average wind speeds reducing renewables output, and a fire at a key power cable which provides us with electricity from France, all reducing supply as demand has remained unabated.

As prices to consumers are capped by Ofgem, this has resulted in a loss for many utility providers, with the cost of obtaining power outstripping the price it may be sold for. A number of providers have since fallen into administration, with more expected as demand increases in Winter. On a more positive note, this can present opportunities for those better structured, with our sister company Octopus Energy taking on a further 580,000 customers after Avro energy ceased trading.

This has not been a problem isolated to the UK, however. On a global scale we have also seen an increase in electricity costs, due to competing demand from increased post-pandemic production, as well as increased restrictions on heavy carbon emitters, such as coal plants. This has reduced profitability for industrial and manufacturing sectors on a global scale, with factory output contracting in China for the first time since February last year.

Evergrande Woes

China and wider Asian markets were further rocked by events surrounding real estate developer Evergrande, one of China’s largest property developers, as it missed its payment deadline for its offshore bond coupon payments at the end of the month.

Valued at approximately $41bn in 2020, Evergrande currently has approximately $300bn in debt, as it continually issued bonds to fund its future developments. Unfortunately a sustained reduction in consumer demand had hindered Evergrande’s ability to fund its suppliers, complete its projects, and in turn meet its payments.

With approximately 29% of China’s GDP relating to construction and real estate, and 20% of its workforce being involved in the sector, these developments have had widespread effects on the outlook on the construction sectors, as well as the health of China’s economy as a whole, with burgeoning fears of a looming real estate crash. There is an expectation among many that to quell these fears it will require significant government intervention, as Evergrande and similar companies may be seen as ‘too big to fail’.

Raising the Ceiling

In the US, Republicans in the Senate moved to block a bill which would increase the debt ceiling; the limit on the national debt which may be incurred by the Treasury to meet its legal obligations.

The debt ceiling is currently set at $28.43 trillion, however if an increase is not agreed, and further debt cannot be issued, it is expected that the US would be unable to meet its obligations by mid-October. Not meeting a payment could seriously affect the US’ sovereign risk rating, and therefore increase the interest required for future debts, as well as souring foreign relations.

As the US has not yet missed a payment in its entire history, it is expected that the Republicans will eventually acquiesce and allow it to increase. However, this event served to highlight the difficulties facing the Democrats as they aim to fund development programs and other stimulus packages to help the economy recover, and dampened the progress of the S&P 500 this month after its recent record highs.

Looking Ahead

With further increases to energy prices, the continued supply chain restraints, and the resultant cost increase for products across the world, it is expected by many analysts that inflation will rise faster than originally anticipated over the next few months.

If this is not a short term event, and prices continue to rise, this will increase pressure on national banks to raise interest rates sooner than later – with the governor of the Bank of England indicating rates could increase by February 2022, or even earlier if deemed necessary.

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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