Early optimism gives way to a more cautious close
A strong start to the year which saw UK shares gain 6% ended the month with most equity markets in negative territory as the initial euphoria surrounding vaccine rollouts lost its edge. The dichotomy in economic data partly reflected differing responses to the pandemic: in America, where lockdown measures were less prevalent, Purchasing Manager Indices pointed to expanding economic activity, while more stringent restrictions across Europe led to a decline in consumer confidence and activity, raising fears of a double-dip recession.
Markets end lower despite a promising opening
In sterling terms, UK indices fell by just under 1%, Japan and the US by 1.5% and Europe by 2%. Emerging markets and Asian shares bucked the trend with gains of 2.6% and 1.4% respectively. Fixed interest bonds ranged from small positives for lower-quality bonds to losses of 1-2% in government bonds.
In America, strong manufacturing data and a resurgent housing market pointed to expanding economic activity. A record number of companies beat analysts' estimates for fourth-quarter earnings and overall were expected to show positive growth on pre-pandemic levels. By contrast, the more stringent lockdown measures across Europe led to a decline in consumer confidence and activity, raising fears of a double-dip recession.
Yellen urges bold action as Biden presses ahead with $1.9 trillion
Former Chair of the Federal Reserve and newly appointed Treasury Secretary, Janet Yellen, said that "right now with rates so low we need to act big," paving the way for President Biden to press ahead with his $1.9 trillion package. Republicans disagreed, countering with a $0.9 trillion package and making the valid point that perhaps not all Americans were in need of the proposed $1,400 handout. Negotiations continued.
Meanwhile, Yellen's successor at the Fed, Chairman Powell, reassured investors that the Board were in no rush to exit their asset-purchase programme, providing further comfort that monetary policy would remain supportive.
The Bank of England flags possible negative rates but holds back
Addressing the state of the economy in its Quarterly Inflation Report, the Bank of England felt that growth in the final quarter of 2020 would be slightly positive, enabling it to narrowly miss another technical recession. The Bank expected growth in the region of 5% for 2021 after a fall of around 4% in the first quarter, severely hampered by lockdown restrictions.
Referring to the prospect of negative interest rates, the Bank warned that commercial banks would need at least six months to prepare for such an event, but added that this did not necessarily mean it would happen. Investors focused on the latter point, with the rates market predicting no such move before the following February.
Political change in Italy and Germany
In Europe, the former head of the European Central Bank, Mario Draghi, was invited to form yet another new unity government in Italy. Across in Germany, the Christian Democratic Union voted Armin Laschet as their new leader, thought to be a safe but uninspiring choice who might struggle to succeed Angela Merkel when she stepped down as Chancellor in September.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Reflation or deflation: the debate takes shape
Near-term sentiment would continue to be determined by the pandemic, though the narrative had moved from the spread of the virus to the speed of the vaccine rollout. Good progress had been made by the UK and US in particular, though differing attitudes to lockdown restrictions had led to a gulf in economic activity and stock-market performance between the two countries. At the time of writing, US markets had already reversed January's falls and recorded fresh all-time highs, while the bounce in the UK and Europe had been muted. In valuation terms this reinforced the relative cheapness of the UK market and, by contrast, the dearness of many US shares.
There was much debate over whether the future would offer reflation or deflation, with views hinging on how the global economy emerged from variations of imposed lockdown. One line of debate focused on the delayed fallout once government support schemes were withdrawn, allowing many businesses to fail and leading to rising unemployment. On the other hand, monetary stimulus had surpassed all historic measures and it would be foolish to rule out the possibility that this would lead to higher future inflation.
With short-term interest rates at record lows and possibly falling further, the question remains how far markets would need to fall to attract fresh money looking for an income return.
Governments and central banks were likely to continue to over-indulge in stimulus measures and were on record as being prepared to tolerate a rise in prices in order to kick-start economies. Whether bond investors would be as tolerant was a different matter, and we had started to see a small rise in yields on longer-dated bonds. If this trend continued, leading to a steepening of the yield curve, it would favour many value shares, and banks in particular. On current valuations, both bond and equity markets remained vulnerable to setbacks.
With markets pricing in a very optimistic future, we are considering reducing some overseas risk. We remain focused on undervalued areas and broad diversification across asset classes.
Underweight bonds at record-low yields
We remain underweight fixed interest bonds and see little value at close to record-low yields. Ninety per cent of global government debt yields less than 1%.
A blend of value and growth, with limited FAANG exposure
We are holding a mix of value and growth stocks but have sought to minimise exposure to US-listed FAANG names, where valuations have become excessive.
Considering reducing overseas risk
With markets pricing in a very optimistic future, we are considering taking a bit of overseas risk out of portfolios while remaining positioned for the recovery.
Alternative assets for diversification
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Examples of these alternative assets include funds invested in gold and silver, infrastructure, agriculture and absolute return strategies.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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