Summary

  • Equity markets began the year on a wave of vaccine-induced euphoria but a spike in bond yields, admittedly only to a level similar to those immediately prior to the pandemic, has been difficult to digest.

  • We see this as the early stage of a normalisation process and away from the ultra-low yields seen during the early part of the pandemic, but we are still a long way short of ‘normal’ in any aspect. The ‘lower for longer’ interest rate and bond yield narrative continues, quite likely for several more years, with consensus not expecting any Fed move until 2023. A slowly rising yield, with a lower terminal rate, is our base case.

  • The pace of vaccine distribution, the easing of lockdowns on the near horizon combined with still high levels of fiscal support, mean the outlook for the global economy is improving. The next few months will witness different speeds in economic recovery dependent on vaccine rollouts.

  • Rising bond yields drove a significant market rotation. Growth companies, so strong in recent years, gave ground to those unloved ‘value’ sectors, such as energy and financials.

  • Government bonds rose globally, but US & UK 10-year gilt yields have risen more than most, reflecting positivity about an economic restart. We still see some limited opportunity in investment grade and High Yield credit with spreads giving a yield pick-up whilst default risk still remains low.

  • Sterling has continued to strengthen against other major currencies. This has had the effect of reducing returns from overseas markets on translation back to domestic UK investors.

  • Rising bond yields increased the opportunity cost of holding the non-yielding gold, which duly fell back to c$1700/oz. Freezing temperatures in Texas and OPEC supply constraints helped oil to $65/bl by month end.

  • Several UK Commercial Property daily dealt ‘bricks and mortar’ funds have re-opened. Whilst dealing in M&G is still suspended, with its cash balance now well over 20% – they have recently stated their intention to re-open during Q2 this year. We remain watchful.

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Conclusion…..spring has sprung

There are good reasons to look forward with a positive outlook over the near term, led front and centre by the vaccine rollout, but also heavily supported by the fiscal and monetary policy backdrop alongside the potential for a consumer spending led increase in economic activity. These are all good signs for economic activity and ‘main street’. Equity and bond markets have moved in anticipation of this and the recovery from last March’s lows has placed valuations ahead, which means corporate earnings now need to grow into their valuations. No recovery is ever straight forward, and we need to be wary of warning signs, such as bond yields rising sharply, vaccine or virus setbacks or a resurgence in geopolitical strains. The history of humanity is littered with surmounting the insurmountable challenge being faced and we are on the verge of writing another chapter in this story. On balance, it is likely to continue to pay in adopting a ‘glass half full’ approach.

It remains our great privilege that you place your continued trust in us in managing your portfolios. We continue to wish you and your families a very happy and healthy year ahead and a spring and summer full of many shared and happy memories.

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