Summary

  • History suggests current equity markets valuations should deliver muted returns from this starting point. We do not feel exuberant but believe forecast strong economic growth and the strength of corporate earnings continues to give some options for markets to grow into their valuations.

  • Additionally, an extended period of above-trend growth lies ahead for 2021 and 2022. Excess household savings, central bank policy support and government fiscal packages remain tailwinds as economies fire back up from their hiatus. This is a supportive backdrop.

  • Longer dated bond yields have retrenched from their year to date highs but shorter dated yields rose as Federal Reserve officials brought forward their expected timing and pace of interest rate rises and contemplated how much to reduce ongoing asset purchases.

  • We see this as a pause for breath as a disconnect emerges between ultra-low yields and strong economic growth. We see some limited opportunity in investment grade and high yield credit, and we use strategic bond funds and short-dated fixed income funds to shelter from rising yields.

  • The threat of bond markets challenging the hegemony of central banks with higher yields should temper investor complacency. The ‘lower for longer’ interest rate and bond yield narrative continues, quite likely for several more years. A slowly rising yield, with a lower terminal rate, is our base case.

  • Inflation is much talked about, but near-term elevated levels will abate as base effects wash through during the summer and supply disruptions in restarting the economy are overcome. A more sustained inflation problem, driven by wage growth is not what we are seeing yet, but should be watched closely over the coming months.

  • Virus setbacks requiring a return to lockdowns are looking less likely in the US, UK & Europe but remain a source of risk in many other regions, particularly given the unequal global distribution of the vaccine.

  • Despite a recent US dollar rally, sterling has continued to strengthen against other major currencies since the year began, particularly so against the Japanese yen. This has had the effect of reducing returns from overseas markets on translation back to domestic UK investors.

  • Late in the quarter, gold fell in the face of a rising US dollar to c$1770/oz, whilst oil prices continued to make steady progress with demand in the US and Europe helping boost Brent Crude to $75/barrel.

  • M&G Property re-opened on the 10th May and we have placed both M&G & Aberdeen Property on the Sell List.

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