Envestnet | PMC (PMC) provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.
China’s crackdown on its technology companies
China’s technology stocks were hit hard in July as the Chinese government started to crackdown on its tutoring and education companies in an effort to cool off the tuition market and lower the educational costs for families. We don’t believe that will be the end of the story. The crackdown is also expected to extend to real estate companies and other “soft” technology companies like social media and e-commerce, which PMC believes may have serious ramifications on foreign investments and the growth of domestic startups. KraneShares CSI China Internet Fund (Ticker: KWEB), an ETF that tracks China’s internet-related companies, plunged 28 percent in July. U.S.-listed Chinese tutoring/education company stocks were nearly annihilated with many down more than 70 percent for the month. Even the top two Chinese technology stocks, Tencent ($588 billion market cap) and Alibaba ($531 billion market cap) registered sharp losses.1 Read our post on this topic to learn more.
The Delta variant meets the economic recovery
As the B.1.617.2, or Delta, variant of the SARS-CoV-2 virus spreads rapidly in areas with low vaccination rates, the Centers for Disease Control and Prevention (CDC) has once again advised Americans to mask up in indoor settings, regardless of their vaccination status. 2 While face coverings serve as a stark reminder of the depths of the pandemic last year, many economists don’t believe the new variant will derail economic recovery, especially since this time around there is an effective vaccine that can prevent symptomatic infection in all but rare cases. However, just because lockdowns and more severe economic restrictions are unlikely to return in the U.S. doesn’t mean that the new variant won’t be disruptive. Lockdowns in some Asian countries with low vaccination rates could exacerbate friction in global supply chains, while hesitancy, even among the vaccinated population, could theoretically result in reduced spending in restaurants, physical retail stores, leisure, and business travel.
On the other hand, some economic data point to a continuation of robust consumer spending, and Fed Chairman Jerome Powell recently observed that successive waves of the virus have brought successively less significant economic repercussions. 3 Buttressing this trend and the likelihood that this current wave may have a muted impact on the recovery, areas with high vaccination rates have seen low infections, while areas with low vaccination rates are unlikely to consider economic restrictions. 4 For anyone hoping COVID was in the rearview mirror, the Delta variant has been an unpleasant speed bump, but at present it appears to be just that.
Air travel returns
After getting beaten down during the pandemic, a combination of government aid and pent-up demand has boosted the industry. While passenger volumes remain down about 20 percent from pre-pandemic levels and revenue from business travel neared 45 percent of pre-pandemic levels, Southwest and American Airlines made a profit during the second quarter – although it should be noted that when government aid is accounted for, both airlines lost money. June marks the first month when both airlines made a profit without assistance from the government. 5
The increase in demand has put pressure on the airlines and they have struggled to adapt to some of the challenges. Severe weather events and some technical issues have created challenges that are further exacerbated by staffing shortages and a lack of seats and planes. Even though the Delta variant threatens to impact demand, airlines are on the path to profitability as people are clamoring for travel.
Could climate change and extreme weather events drive the food inflation higher?
Global supply chain disruptions have continued to drive food prices higher. First, the African swine fever in hogs in China, then the US-China trade war and subsequent introduction of additional tariffs, and now the global COVID-19 pandemic. 6 Just when things couldn’t get worse, climate change and extreme weather events have wreaked further havoc on the supply chain. This year alone, we’ve dealt with heatwaves across the western U.S., Turkey, and Northern Africa; floods in Western Europe, China, and India; and frost in Brazil, which has impacted the prices of coffee, hogs, cereals, and grains.7, 9
Consumers in low-income countries are expected to face the brunt of a rising food inflation due to their higher dependency on food imports, which ultimately translates into higher retail inflation. 8 A weakening currency also makes their food import bill more expensive. Whereas the inflation numbers in U.S. – primarily driven by transitory factors such as used car prices, unpredictable climate events 9, and subsequently higher agriculture commodity and food prices – may result in prices remaining higher for longer than anticipated. The IMF anticipates this trend to pick-up by the end of 2021 and continue into 2022. 6
- “Why China Is Cracking Down Now on After-School Tutors,” Bloomberg News, July 25, 2021, https://www.bloomberg.com/news/articles/2021-06-09/why-china-s-cracking-down-now-on-education-tech-firms-quicktake
- “Coronavirus Disease 2019 (COVID-19),” Centers for Disease Control and Prevention, https://www.cdc.gov/coronavirus/2019-ncov/index.html
- Neil Irwin, “Is the U.S. Economy Too Hot or Too Cold? Yes.” New York Times, July 29, 2021 https://www.nytimes.com/2021/07/21/upshot/economy-usa.html
- “Delta variant and high prices cannot keep the US consumer down,” Financial Times, https://www.ft.com/content/bbc4f39f-8629-4a44-93d1-477faafa57ac
- Alison Sider, “American Airlines, Southwest Lifted by Recovering Demand and Government Aid,” Wall Street Journal, July 22, 2021 https://www.wsj.com/articles/american-airlines-southwest-lifted-by-recovering-demand-11626955716
- Christian Bogmans, Andrea Pescatori, and Ervin Prifti, “Four Facts About Soaring Consumer Food Prices,” IMF Blog, June 24, 2021 https://blogs.imf.org/2021/06/24/four-facts-about-soaring-consumer-food-prices/
- Laura Millan Lombrana, “The Heat, Floods, and Fire We Don’t Hear Enough About,” Bloomberg, July 26, 2021 https://www.bloomberg.com/news/articles/2021-07-26/why-is-the-weather-so-weird-it-s-climate-change?
- Gene Kindberg-Hanlon, “Food price volatility and inflation in low income countries,” World Bank Blogs, July 2, 2021 https://blogs.worldbank.org/developmenttalk/food-price-volatility-and-inflation-low-income-countries
- “World’s Food Supplies Get Slammed by Drought, Floods, and Frost,” Bloomberg News, July 24, 2021 https://www.bloomberg.com/news/articles/2021-07-24/world-s-food-supplies-get-slammed-by-drought-floods-and-frost
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