International and Global Markets Commentary & Investment Outlook
October 11, 2021
Global equity markets were mixed in the third quarter but biased to the downside. The U.S. market was up modestly, developed markets were down modestly, and emerging markets were down significantly. The latter was due in large part to a sell-off in Chinese equities following broad and continuing regulatory pressures. Furthermore, September was a unique month because equity markets sold off wholesale as inflation worries came back into focus.
In this environment, Chautauqua’s portfolios appreciated in value and protected against the downside. This year, we have actively trimmed weightings in China to contain the specific risks from regulatory pressures. Additionally, we have made a series of adjustments to reduce holdings with extended valuations and increase holdings we believe are well-suited to transmit pricing power or have more attractive valuations. These adjustments should help insulate against the most deleterious risks of inflation.
Global economic output has already surpassed pre-pandemic levels, helped by strong policy support, progress in vaccinations, and the resumption of many economic activities. However, from a regional perspective, the recovery remains uneven. Large differences in vaccination rates between countries are one of the biggest contributors to the unevenness, and output gaps are most pronounced in emerging markets where vaccination rates are low. The economic impact of the highly transmissible Delta variant has lowered near-term momentum and added pressures on global supply chains, but the fallout in countries where vaccination rates are high has been relatively mild.
In the U.S., the Delta variant caused consumers to slow spending in categories such as travel and dining, but it did not knock the recovery off its course. The drag from the Delta variant has been less severe than in previous surges. As case counts and hospitalizations have already peaked in this wave, economic growth is expected to reaccelerate during the fourth quarter, and growth forecasts for next year have been revised higher too.