October was a good month for stock markets, with the MSCI World Index rising 5.5% in local currency (USD) terms to set new high levels, but only 1.5% in Australian dollar (AUD) terms due to the appreciating AUD. Stock markets have really chalked up a remarkable run of strong returns, with the two-year (non-compounded) return of 45% (USD terms) despite a global pandemic and associated recession. Momentum continued into October as decent company profit reports helped to reassure investors and drive up stock prices. Our Orca Global Disruption Fund had a stellar month, rising 4.3%1 , helped by their Tesla holding, which rose 43% in USD terms. Global markets have been in a sweet spot of rising company profits with falling concerns about central bank action curtailing the party. The majority of companies have now reported profits for the third quarter of 2021. In the US, profits are up 40% compared to this time in 2020, and 31% better than in 2019, pre-pandemic. Consumers globally are returning to pre-pandemic behaviour, although there’s retention of some lock-down habits in how goods are bought and consumed. International tourism is set to return as vaccination rates improve, which is a big factor for companies dealing with credit cards, phone bills, travel bookings, and of course airlines and plane manufacturers. In general, this return of normal movement has been slower than hoped, with the Delta strain causing further breakouts and restrictions, but where economies have fully reopened, consumers are spending well. The biggest story over the past few months has been supply chain disruption. Across all sectors and companies globally we’ve heard about issues with the supply chain. By the supply chain, we mean the ability to obtain goods and services necessary to operate. This might be the ability to get a truck or a ship to deliver goods or parts, or the ability to obtain coal, copper, oil, or chemicals at a reasonable price. Labour is a big issue, as there are generally less workers available, and workers are asking for higher wages and conditions. The labour supply is hit by sickness, lack of child care, and a reduction in cheaper international workers. We’re seeing this around Australia with shortages of service and manufacturing staff, and it’s no different elsewhere, with shortages of truck drivers, restaurant workers, warehouse operators, and nurses. And when inflation is resulting in a higher cost of living, it’s fair that wages will rise to match.
All of this means more costs to companies, which means they pass on higher prices to us, which is why we’re seeing inflation everywhere. In company profit announcements, CEO’s are detailing the issues with supply chains. Even if the supply to them isn’t impacted, often their customers are. In key areas such as semiconductor chips for phones and computers, companies are predicting issues until the middle of 2022 at least. The impact on stock markets is a bit mixed – if costs are up then that’s a bad thing. But if companies can raise prices enough to protect profits then the share market will shrug off higher costs. The issue is how consumers will afford ever-increasing costs. Wage increases help, but with less total workers the size of the economic earnings pie could still be smaller than in 2019. 2020 spending was boosted by government assistance, but this will be curtailed by 2022. Unless we see total wages earned accelerating, at some point consumer spending will come under pressure, which would undermine stock market values. This is what we’re watching out for in economic releases and company profit statements, but so far we don’t see enough to worry us about stock markets. The third quarter has shown that consumer spending is strong, companies are making better profits than ever, which is why we’re happy with stock markets where they are. Fourth quarter is the Christmas quarter, so we’ll look out for strong signs of festive cheer, and beware of any supply chain disruption humbugging the market. As previously mentioned, the Orca Global Disruption Fund had a strong month, rising 4.3%1 . The Orca Global Fund posted a positive return, up 0.6%1 . Although the Orca Asia Fund fell 1.7%1 over the month, this was much better than the MSCI Asia ex Japan Index, which fell -2.7%. The Orca Asia Fund was more defensively positioned through our diversification away from China.