Energy funds have dominated the top 10 performers in September, as investors weighed up whether inflation is here to stay.
The top two performing funds for the month were Guinness Global Energy and BlackRock World Energy, returning 15.08% and 14.03%, respectively. Rounding out the top three was the GS North America Energy & Energy Infrastructure fund with a return of 11.21%.
Japan-focused funds also ranked high in the performance tables, with three funds in the top 10 in September. The Janus Henderson Japan Opportunities, Lazard Japanese Strategic Equity and Man GLG Japan Core Alpha funds all featured in the tables, with returns of 7.28%, 6.48% and 6.22%, respectively.
The Japan and Japanese Smaller Companies sectors were the top performers, with average returns of 4.62% and 3.49%, while the Commodity/Natural Resources sector returned 2.02%.
The great inflation debate
According to Ben Yearsley, director at Fairview Investing, September was “muted” when compared with previous months that featured record highs in the US markets, as concerns over Covid, inflation and energy prices fed through to investors.
“The inflation debate is probably the main debate today; is it transitory due to the base effects of falling prices in 2020, or has the huge stimulus thrown at economies combined with shutdowns and supply chain disruptions ushered in a new era of sustained higher inflation? Does it matter?” he says.
“It still feels transitory, however, the longer external disrupting factors play their part, for example the HGV driver shortage in the UK, the more likely inflation is here to stay. The Fed has pencilled in a figure of 4.2% inflation for 2021, yet they are still purchasing bonds. The fuel crisis, linked to the shortage of HGV drivers is causing a problem in the UK, though it is the price of gas that is the important issue to watch out for,” Yearsley adds.
Independent wealth consultant, Adrian Lowcock, says that the performance of energy funds is not too surprising, with the rocketing of natural gas prices and oil over the past month supporting the prices of energy firms and oil majors.
“The speed of the price rises has been significant and started to be reflected in equities in September. The market has largely ignored the potential impact higher energy prices and disruption to supply chains might have on the global economy, with a view the pandemic is easing and looking to winter when energy consumption is higher,” he says.
Changes in Japan
Lowcock explains that much of the performance to date has been driven by the resignation of prime minister Suga at the start of the month over his handling of the pandemic and decision to hold the Olympics while it was ongoing.
“With his popularity dwindling it was likely the LDP party would lose more seats in the election this autumn,” he says. “As such, his resignation gave hope that his replacement will boost the party and will increase stimulus to support economic recovery following the pandemic.”
In September, Japan’s ruling party, the Liberal Democratic Party, elected Fumido Kishida as its new leader and today (October 4, 2021), he has been approved as the country’s prime minister.
At the time of his election as leader, Nikko Asset Management’s chief global strategist, John Vail, said he will impress the voting public because of his focus on forming a “youthful cabinet, with women in several major posts”.
“This, combined with a rebounding economy with fewer social restrictions, should impress the voting public so much that the LDP should win by a very large margin in early November. This should lead to hopes for the cabinet’s longevity which consumers, corporations and investors should view positively,” he says.
“Continuing modernising reforms will be pursued, but no sharp turns either to the left or to the right. The need for fiscal stimulus will likely be reduced as the economy rebounds, but efforts will likely be made to reduce wealth inequality.”
This is likely to add to investor confidence in the Japanese market, putting to bed fears that the country could have seen a return of the revolving door of political leaders.
“Japanese political uncertainty was one of the risks we highlighted in our Brooks Macdonald Q2 Quarterly Markets Overview from July this year. In it, we wrote that ‘should PM Suga leave office later this year, it could signal a potential return to the ‘revolving door’ style of Japanese politics which preceded former PM Abe’s second term’. Between 2006 and 2012, Japan saw six different leaders in as many years,” explains Matthew Cady, investment strategist at Brooks Macdonald.
“This matters for investors as a potential lack of political stability could raise risk premiums for Japanese equities. Investors will be watching to see if there is a continuation of ‘Abenomics/Suganomics’ or if there is a change in direction.”
