Stocktake: Markets grapple with Covid risk

Markets can be fickle, as evidenced by recent price fluctuations. Talk of an inflation scare has dominated market commentary in 2021 but investors have done a U-turn on the topic, with the focus shifting towards the possibility of a global growth scare.

Fears that the Delta variant could catalyse another economic slowdown caused heavy stock and commodity price falls on Monday last week, only for the market mood to turn brighter on the following days as prices turned north once again.

Nevertheless, Monday's plunge was an obvious reminder that Covid risk has not gone away. "The Covid trade is back," headlined Bespoke Investment, noting that the best performers were also the best performers during spring 2020's Covid crash, and vice versa.

Although indices remain near all-time highs, under-the-surface action confirms investors have been adjusting expectations for some time. Defensive quality stocks – safe, solid companies that deliver reliable profits – have been outperforming since March, with investors bidding farewell to economically sensitive cyclical stocks.

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July has seen the biggest outflows from value funds since January 2020, whereas so-called smart beta funds allied to the quality factor are headed for their best month since the dark days of March 2020.

Economic bulls, like Fundstrat’s Thomas Lee, argue the Delta variant represents “more bark than bite”. Markets being markets, the mood may well shift again.