Investment Strategy:  First Quarter 2021 – General Market Review

Summary

  • Equity markets rallied strongly in the last two months of the year fuelled initially by the US election result and then by the announcement that mass global immunisation against the coronavirus would begin in the first half of 2021. Equity market returns for the year as a whole were surprisingly strong, bar in the UK.

  • The biggest bounce was in the regions and stocks which had been most badly hit by the pandemic. This included the UK and Europe and the ‘value’ sectors such as energy, industrials and financials.

  • The longer term outlook for the global economy is improving but the next few months will be weak after the very damaging ‘second wave’ of Covid infections. The ‘lower for longer’ interest rate and bond yield narrative stretches out ever further, quite likely for several more years.

  • A striking feature in 2020 was the huge relative outperformance of growth sectors (most notably technology) over economically sensitive value sectors (energy, industrials, financials, leisure). We expect less of a style divide this year.

  • Despite its strong finish, the FTSE remains a laggard to other world markets falling 12% last year due partly to Brexit and the poor policy response to the pandemic but mainly because of its heavy ‘value bias’ in index composition.

  • Asian markets produced the strongest returns last year reflecting their greater success in eradicating Covid and their heavy index weightings in technology and e-commerce stocks, the big ‘winners’ in 2020.

  • Interest rates remaining close to zero and a strong recovery in corporate earnings are the key to equity markets producing positive returns this year.

  • Gold finally broke through the US$2,000/oz barrier in the summer but has pulled back to US$1850/oz. Oil has bounced strongly in the ‘risk on’ rally to US$50/bl.

  • Government Bonds offer negligible yield and little prospect of capital growth but we still see some opportunity in investment grade corporate bonds, with spreads giving a substantial yield pick-up whilst default risk remains low.

  • The US dollar is also coming under increased selling pressure. Sterling has as usual been a hostage of fortune to Brexit, a cloud now finally lifting.

  • Several UK Commercial Property daily dealt ‘bricks and mortar’ funds have re-opened, though not at this stage M&G.

Even the longest night gives way to the dawn…

Our Q4 newsletter last October ended with the following quote from Alfred, Lord Tennyson and it feels appropriate to repeat it once more despite the challenge of some very difficult months ahead.

Hope smiles from the threshold of the year to come, Whispering ‘it will be happier’ 

The dedication and brilliance of our global pharmaceutical companies has produced a series of vaccines which mean that, as we stand on the threshold of 2021, we can indeed look into this new year with renewed hope.

Financial markets ended last year strongly and after the huge falls in February and March the final three quarters of the year were surprisingly heartening for investors with double digit gains in a number of equity markets. Of the major markets, only the UK ended in the red with the FTSE100 index falling by 12% for the year. Bond markets too produced above average returns. The strength of financial market recovery was a testament to the speed and commitment of the policy response from Central Banks and Governments; the belief that economic recovery will be robust in 2021; the resilience of the corporate world to meet the challenge of the pandemic and ultimately in the astonishing speed at which these vaccines have been produced.

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Conclusion…..Happier Times Ahead

You will have heard us say many times that the bears have all the best stories and that those predicting wariness and caution always appear to have more gravitas than the stripy shirt and braces ‘it’ll be alright on the night ‘crowd. Those stories last year have sadly been as bad as it gets with a global pandemic leading to the worst economic crash for decades, a horribly divisive US election and Brexit inevitably bringing its own little kernel of gloom. Yet while the road can be very rocky on occasion, it pays to remain optimistic. Brexit is finally done and Trump has gone, taking a major source of market unpredictability with him. The pandemic has been brutal and is still with us but the global economy is weathering the storm and the huge global immunisation programmes this year will bring increasing normality to our lives. So long as interest rates and bond yields remain low then risk assets, notably equities, should continue to flourish.

It is our sincere wish that this is the year when we are able to smile again and that hope, not fear, is our prevailing emotion. We are aware that the next few months will be particularly hard and fervently hope that you stay safe and well. As always, we thank you for the continued trust you place in us in managing your portfolios and as we look forward to the year ahead, we wish you and your families a very happy, healthy and enjoyable 2021.

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