Global equity markets made further progress in April. Strong corporate earnings and an improving economic outlook fuelled the gains. Global economic momentum is strong but with considerable variation between countries and regions. In places with advanced vaccination programs, such as the UK, infection rates and hospitalisations are falling dramatically and the economy is rebounding strongly. In contrast, Brazil and India are witnessing a significant rise in infections and their healthcare systems are struggling to cope.
The unprecedented nature of the Covid recession was highlighted by data from The Office for National Statistics showing that household wealth had risen to record levels on the back of rising house prices, increased value of defined benefit pensions, and government support. Household net wealth rose to £11.4 trillion, the equivalent of £172k per person in the UK. The increase in household wealth at a time of increasing public sector indebtedness will invariably lead to further questions over the intergenerational fairness of the economy. With the preferences of the median voter continuing to shift leftwards, some form of wealth tax appears inevitable. The direction of travel is already evident in the US where President Biden is planning to roughly double the top rate of federal tax on capital and dividends.
As economies become older and wealthier, and the dependency ratio increases, the focus will not only be on taxation but the potential longer-term impact on inflation. The reintegration of Eastern Europe and China into the global economy generated a significant positive supply shock that reduced labour costs and kept inflation low. As demographics deteriorate there is every possibility that inflationary pressures increase. Inflation remains the biggest risk to equity markets both in the short and longer-term. The Federal Reserve faces a difficult task in balancing short-term base effects against the risk of rising inflation expectations. We are positive on equity markets but expect volatility to increase.