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What’s happened to investment markets so far this year?
A view of the markets from the TPO Investment Committee
The first six months of 2021 can be characterised by the global rollout in COVID-19 vaccines, continued extraordinary monetary stimulus measures from governments and central banks and the prospect of higher inflation on the horizon.
Global economies have rebounded above their pre-pandemic pandemic peak and the IMF now forecasts that global growth should reach 6% for 2021 which if achieved would be the fastest pace of growth in nearly five years – we must consider though the large disruption the pandemic caused and the low base we are basing this improvement in growth on.
US
The US recovery story continues as the economy grew 6.4% in Q1 following the progress that has been made in the rollout in vaccinations which has allowed for certain parts of the economy to reopen and for some of the pent-up demand to be exercised by consumers.
This has been magnified by the stimulus measures implemented from the $1.8tn (trillion) American Rescue Plan which increased unemployment benefits by $300 to ‘The American Jobs Plan’ which will allocate $1.2tn to help develop the country’s infrastructure.
In response we saw markets rotate into previously unloved cyclical and value stocks (these being stocks which are sensitive to economic activity) while the anticipation of higher inflation saw the yield on a US 10-year Treasury Note reach a high of 1.72% in March. Yields have since retraced but with fears of inflation yet to abate we continue to see a challenging environment for bond investors and a material price increase for bonds look unlikely.
Europe
Europe has lagged the US and UK in terms of vaccination rollout, but we are beginning to see signs of recovery as restrictions on mobility and travel are being relaxed.
Sentiment surveys are also beginning to improve with Germany’s IFO survey (a leading indicator of economic activity) of business expectations reporting its highest reading since January 2011 which suggests there is further growth to come in Europe. This backdrop saw European equities report one of the highest returns in 2021 (up c. 15% YTD) as the improvement in economic prospects and prospect of higher inflation saw investors move into the cyclical value European equity market.
The European Central Bank remain resolute in continuing to provide support to the economy which when you consider the potential risks of further lockdown measures, political volatility etc has been considered a prudent move by markets.
UK
GDP growth in the UK could reach 7% in 2021 following the 9.9% decline that was reported in 2020. This will coincide with higher consumer spending which is expected to increase 5.7% in 2022 along with inflation increasing to 2.2% over the same time period.
Given the uncertainty that persists the Bank of England have indicated that they will continue to keep interest rates low which will be a headwind to Gilt yields. That said this should be supportive for UK equities especially if we see a further recovery in the economy as this means the cost of debt for companies will remain low.
Japan
Japan has lagged behind its developed peers in the rollout of vaccinations, and this has led to weak capital spending and private consumption in the economy. The Q1 GDP figure was revised to -3.9% (from -5.1%), however given that private consumption makes up more than half of Japan’s GDP then the rollout of the vaccine and reopening of the economy will be key to Japan’s recovery moving forward.
Mild disinflation is expected to persist as whilst the country’s export market will benefit from a recovery in the global economy the structural themes of an aging population and the slowdown in the growth of the middle class will keep inflation subdued.
Emerging Markets
Historically, Emerging Markets (EM) tend to be more adversely impacted by market stresses, however we have seen these countries exhibit more resilience following the breakout of the pandemic.
EMs have been supported by the positive spill over of the recovery in developed market economies and the modestly weaker US dollar has also been a supportive factor. Furthermore, we have not seen the same build-up in national debt as we have seen in other areas of the market which raises the long-term prospects of EM countries.
This has led to GDP forecasts being revised to 7.2% in 2021, however we do not expect the recovery to be evenly distributed with those countries who have been more effective in dealing with the pandemic leading the way for example China have been able to start deleveraging their economy when at time most western countries are engaging in mass stimulus policies.
To read our full monthly market commentary please visit: www.theprivateoffice.com/marketcommentary
If you would like to discuss anything we have raised here then feel free to get in touch with your TPO adviser.