Economic & Market Overview
- Stock markets in regions with the more advanced vaccine rollouts registered the strongest gains, with US and European equities leading the way.
- US GDP growth for the first quarter came in at 6.4% annualised, a level not seen since 2003.
- Growth stocks outperformed, buoyed by increased confidence that US monetary policy will remain benign.
Equity markets registered strong gains, with economies leading the vaccine rollout race, or showing an ability to catch up, being rewarded the most. As a result, US and European equities lead the way. Commodities shone during the quarter, with the copper price bursting through $10,000 a tonne to set a record new high. Demand for the metal has gone stratospheric as the environmental agenda guides consumers towards all things electric. Despite a raft of positive economic data releases pointing to exceptionally high growth and rising inflation, an environment that is typically beneficial for more cyclical value stocks, the second half of the quarter saw a rotation into growth stocks as the delta variant of Covid-19 took hold and bond yields fell.
US GDP growth for the first quarter was released in April, showing growth at 6.4% annualised, a level not seen since 2003. Manufacturing Purchasing Managers Indices (PMIs), indicators of corporate business conditions, boomed, with the same surveys for service companies also rising in countries further ahead with lockdown easing, such as the US and the UK. Midway through May, US employment data released for the month of April fell wide of the mark, as 266,000 new jobs were created against expectations of one million. Having soared to 1.77% at the end of March, US Treasury yields declined, as investors increasingly bought into the Federal Reserve’s (Fed’s) rhetoric of inflation being transitory, driven up by the re-opening of the US economy and short-term supply constraints.
Growth stocks that were the darlings of the pandemic for much of last year had struggled to make further headway against more economically sensitive companies since the announcement of vaccines in November 2020. However, they outperformed over the second half of the quarter, buoyed by increased confidence that US monetary policy will remain benign. Rising concerns over the delta variant helped them along their way, as a slowing of growth reduces perceived inflationary risks, and technology stocks went from showing losses to being clear outperformers by quarter end. This was in spite of US headline inflation for the month of May, released in mid-June, exceeding forecasts as it hit 5%, far above the Fed’s target. This prompted a hawkish about turn as the Fed brought forward expectations for the first rate hike to 2023, catching many investors off guard as the dollar rallied and took a little shine off the equity rally.
At a country level, Japan was a notable laggard. Having dealt with the first wave of Covid-19 more effectively than most other developed countries, it has since struggled, as the lack of an effective vaccine rollout programme has combined with a hesitant population to delay economic recovery. As a consequence, Japanese equities sustained a small loss over the period.
While for many investors Fixed Interest has become increasingly unattractive, as low current yields provide neither an attractive amount of income nor the usual level of protection during periods of stock market volatility, the asset class produced solid returns in Q2. High yield corporate debt outperformed, benefitting from the rally in US Treasury bonds.
The lower risk portfolios delivered a return of 1.1% to 1.9%. Global equities advanced in Q2, supported by the accelerating roll-out of Covid- 19 vaccines. Whilst concerns over new variants limited gains in certain markets, it helped temper concerns over inflation, meaning that Fixed Interest enjoyed a good quarter as well. The result was strong performance overall, with T. Rowe Price Global Focused Growth Equity delivering 6.1% whilst, within Fixed Interest, the standout funds were AXA Sterling Index Linked Bond and GAM Star Credit Opportunities, gaining 4.6% and 2.9% respectively.
The medium risk portfolios delivered strong returns of 2.4% to 3.1%, and the high risk portfolios returned 3.6% to 3.8%. The advance in equities also resulted in good performance overall, with Man GLG Continental European Growth and BGF Next Generation Technology delivering 10.1% and 9.3% as funds with a ‘growth’ style recovered ground after having underperformed earlier in the year.
Finally, Absolute Return performed well to make it a positive quarter across just about all major asset classes, with a notable contribution from BlackRock European Absolute Alpha, rising 4.5% after a difficult period.
Tactical Asset Allocation
- No change.
Equity markets have continued to make further gains, fuelled by continued loose monetary policy from central banks, expectations of further fiscal spending from governments (particularly in the US), and strong economic growth as economies reopen. On this last point, investors continue to focus on markets whose economies are most advanced in their reopening, and governments have realised that, even if they dealt with the first wave well, with examples being China, New Zealand and Japan, the key to a return to normality is a successful vaccine rollout.
Economically sensitive stocks negatively impacted by the pandemic have benefitted the most from the recovery. However, returns have begun to broaden out in markets, and a greater variety of sectors and stocks have risen whilst investors give central banks the benefit of the doubt over inflationary pressures.
The huge scale of savings that have been accumulated during the pandemic, particularly in the US, is expected to benefit economic growth, not just this year but next year too, and perhaps even beyond. However, it is not just consumer savings that have risen, as many companies were able to raise capital too, with the result expected to be a strong reinvestment cycle and increased capital expenditure.
Over time, governments will increasingly put in place measures to help their economies hit net zero carbon emission targets, with many aimed at 2050. These changes will undoubtedly raise investment in all things ‘green’, whilst taxation is likely to be used as a tool to generate the corporate and individual behavioural changes required to achieve these targets.
All of these factors could lead to growth and inflation proving to be stronger and more persistent than markets are expecting today. However, rather than positioning for inflation getting out of control, it seems more prudent that investors maintain an expectation that central banks tighten monetary policy earlier than they are signalling today.
Of course, all growth expectations are predicated on the successful rollout of vaccines and their continued success against further mutations. The risk of this not being the case remains significant whilst large swathes of the global population remain unvaccinated. However, with governments increasingly adopting a ‘learn to live with it’ approach to the virus, and significant signs of lockdown fatigue in some populations, another global lockdown is not expected to have as devastating an impact on demand as before.
With the major risks being centred on viral developments and how economies react to unprecedented conditions, we are sitting firmly on the fence on a number of ‘impossible to predict’ issues. As a result, we are maintaining a balanced portfolio with diversified exposure across the globe, holding both reflationary stocks and the structural growth companies of the future, increasingly recognising the importance of environmental concerns. Whilst valuations are elevated, we remain neutral in our equity exposure, as the potential for high economic growth to reset these valuations is real, and we would consider any significant pullback in markets to be a buying opportunity as long as our confidence in vaccines holds.