Since March last year equity markets have been reliant on the expectation that the huge and combined central bank and government support would see us through to a re-opening of the economy and allow us to look through the dreadful economic news. We can reflect today and conclude that this has largely been a success as the vaccine roll-out helps pave a route to the unleashing of consumer spending and economic animal spirits.

The market response, particularly since the announcement of positive vaccine news, has pushed equity market valuations to a point where corporate earnings and profits need to come through in order for them to grow into the valuations being asked. Markets are not cheap, but are not unjustifiably expensive either; however, with higher valuations come greater risks that negative news can have oversized effects.

In some areas, the sensitivity to rising bond yields highlights the limited capacity for rates to rise further without causing spikes of volatility. We need to be alive to a market rotation. At the beginning of 2020 we were cautiously optimistic that whilst we were late in the economic cycle positive returns could still be achieved. In short order, the pandemic has dragged us through the ending of one cycle and into the early stages of a very well supported economic recovery, with a consumer in better health than usually expected in a recession.

Greater visibility on the recovery and roadmap on re-opening are needed to increase risk in portfolios from here, but the long-term outlook dictates that investors are likely to be best served adopting a positive, but not rose-tinted, outlook.

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