The state of the world’s health seems to have turned a corner since our last investment communication. Notwithstanding the terrible situations in those countries struggling to get on a grip on the pandemic such as India and Brazil, at last there appears to be real hope that COVID-19 will be defeated sooner rather than later.
Although it was inevitable that the progress of individual nations has varied, it is shameful that political ideologies and squabbles have taken priority over human life in too many instances. Thankfully the UK and US administrations have placed considerable focus on their vaccination efforts, as have some smaller nations such as Israel, bringing with it a reduction in transmission rates
The hope is that something closer to daily life will now follow, at which point much of the lost ground of the past year could potentially be made back in terms of both economic recovery and personal freedom.
Against this backdrop, it was perhaps not surprising to have seen Value/Recovery stocks surge since the first vaccine announcement was made in early November. Smaller companies, with their increased sensitivity to global economic growth, also outperformed.
Although the entire stock market tide rose, highly priced Growth/Quality/Momentum stocks (in general terms, past winners of recent years) have struggled in a relative sense since the first vaccine announcement in November. Global Technology (+9.6%) and Healthcare (+2.2%) have seen relatively muted gains compared to Financials (+28.4%) and Commodity Producers (+35.6%). [MSCI World sectors measured in GBP terms between opening prices 09/11/2020 to 20/04/2021]. There is talk that this rotation into ‘out of favour’ sectors is the beginning of a longer trend. Either way, the KMD portfolios have enjoyed this turn in sentiment and are well positioned if the new momentum does persist.
Commodities prices have trended upwards in line with anticipated economic demand. There is a suggestion that notably higher demand could create supply shortages and inflationary squeezes. Supply chains have also been disrupted by the impacts of semi-closed economies – notably in semi-conductor chips – in which Sino-American tensions have also become elevated.
Whether or not inflation may come to rear its ugly head has become a big discussion point in financial market circles in recent months. Central banks are keen to introduce some mild inflation into the system as it would be a useful way of helping erode some of the gargantuan public debt pile by stealth.
According to central bankers, although central bank policy interest rates globally look set to stay on the floor for several years, bond markets have started to price in a legitimate case for higher interest rates sooner than was generally expected back in late 2020. This will no doubt please savers.
As a result, global bond yields spiked rapidly during January and February causing significant losses to conventional defensive fixed income Government bonds. US Treasury Government Bonds saw their largest quarterly decline in 40 years, justifying our light stance with so-called ‘riskless’ bond investments. (Nothing is riskless if you overpay).
It was not only conventional Bonds that fell in value. ‘Bond proxy’ defensive equity instruments such as Consumer Staples, Utilities and Infrastructure stocks also struggled, as did Gold, despite the longer-term arguments for the yellow metal in the event of heightened inflation prospects. But in the short-term, the defensive stance lost that tug of war.
Turning to global stock markets, our taking of pole position on vaccines meant that British stock markets powered ahead against global yardsticks. For a similar reason, US equities also outperformed, despite their heavy Tech and Healthcare weightings – other areas did the heavy lifting.
In currency markets Sterling rallied, while UK Small and Mid Cap stocks outperformed to an even greater extent than the FTSE 100. Sterling assets look like they are beginning to play catch-up after being left on the ‘naughty step’ in recent years.
In the Emerging Markets, Brazil and India look to be under immense stress from surging infection rates and hospital infrastructures struggling to cope. Unlike their developed market counterparts, general rising indebtedness levels in the emerging world could potentially pose more serious financial credibility problems. Large developed Western countries have the keys to the printing presses, whereas emerging countries have traditionally faced little choice but to keep their houses in order otherwise they run the risk of traditional financial crises. Ensuring that those in the developing world receive access to vaccines will be critically important in avoiding this fate at a difficult time for their people and economies.
On the other side of the Channel, political bickering and inaction in Europe looks to have presented the real risk of a third virus wave across much of the continent, in contrast to the proactivity demonstrated in the US and UK. Asia also looks to have the virus and economic situation largely contained, highlighting yet again the case for regional diversification within investment portfolios at all times.
Wrapping up, financial markets have continued to progress to dizzy new heights, hitting new peaks on many international stages. This has been fuelled in part by optimism and also due to the immense global fiscal stimulus packages that have been put in place, leaving the financial system awash with cash. The inflation hawks and gold bugs are starting to speak up as expectations for higher prices creep in.
Stock and bond market valuations are both on the high side, albeit there is polarisation between the various camps. The real elephant in the room would be that unexpected inflation could threaten equity and bond markets simultaneously. Given the risk posed by this dynamic to traditional bond and equity portfolios, we are mindful of the need to remain vigilant on this count.
It would appear that 2021 has got off to a very good start, but by summer we are likely to be in a position to know whether that bullish optimism today can be justified by the data. Fingers crossed that it can.
The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.