Monthly review and outlook - April 2021
- 16 April 2021
- 5 mins reading time
It was a mixed picture for global investments in March. Stocks in developed markets, such as the US and Europe, generally rose in price as hopes for an economic recovery grew, while those of emerging markets underperformed. The demand for and prices of bonds continued to fall in the US and UK.
US equities rose amid earnings optimism, supportive monetary policy from the Federal Reserve (low interest rates and sustained bond-buying), and the $1.9 trillion fiscal stimulus bill from the current US administration. Investors continued moving money out of technology and other conventional “growth” stocks. Miners, consumer staples and industrials were more in vogue as their prospects appear to have improved.
UK equities performed well. As the country took its first steps to ease lockdown restrictions, the Office for National Statistics confirmed that the unemployment rate unexpectedly fell to 5% in the three months to January. Meanwhile, Chancellor of the Exchequer, Rishi Sunak, extended many of the financial support measures made available during the pandemic.
Eurozone shares also rose over the month. Among the top-gaining sectors was consumer discretionary, with automobile and component stocks performing well. All sectors posted a positive return. Investor sentiment was supported by a sharp rise in business activity as indicated by the flash eurozone Purchasing Managers’ Index (PMI) for manufacturing in March. This reached a record high of 62.4. A PMI reading above 50 indicates economic expansion whereas a reading below 50 indicates an economic contraction.
Returns across the Asia Pacific region were mixed. Japanese equities rode the positive wave, but other countries were held back by the rising value of the US dollar (which makes their dollar-denominated debts more expensive to service), and by on-going friction between the US and China.
Turkey was the big loser of the month after President Erdogan unexpectedly replaced the central bank governor, undermining investor confidence and triggering a sell-off in Turkish assets.
With investors becoming more optimistic about the future, they withdrew money from low-risk rated investments such as government bonds. That sent the prices of those bonds down and their yields up (the price and yield of a bond always move in opposite directions).
This sent the US 10-year Treasury (government bond) yield up from 1.45% to 1.75%, completing the reversal of the decline which started in January 2020. The UK equivalent was little changed.
It was a different story across Continental Europe where demand for bonds rose amid continued difficulties with vaccine rollouts. That sent the yield on the 10-year Bund (German government bond) down from -0.29% to -0.33%.
Unlike their government counterparts in the US and the UK, the demand for and prices of corporate bonds generally rose as investors anticipated a rise in corporate revenues, suggesting that those companies would be more readily able to meet their bond payments.
The overall demand for commodities was affected by rising levels of Covid-19 infections across many parts of the world. That negative sentiment sent the S&P GSCI Index down in March. The higher value to the US dollar pulled some commodity prices up, also reducing demand.
We continue to prefer higher-risk rated assets such as equity, over lower-risk rated ones, such as government bonds.
Over recent weeks, the introduction of vaccines and bigger-than-expected financial stimulus from governments and central banks has accelerated the recovery and lifted investor expectations.
We expect this to push inflation higher over the short term, not least because of the higher prevailing oil prices compared to one year ago. But our analysis suggests that there is still sufficient spare capacity in the economy (such as under-used labour and machinery) to meet the growing demand without giving rise to longer-term inflationary problems.
As equity has become more attractive, the demand for and prices of bonds have declined. As a result, bond yields have risen recently (the price and yield of a bond always move in opposite directions). While improved, those yields still do not present sufficient incentive for us to increase our holding of them at this time.
If bond yields were to continue rising, they could attract some investment out of equity. With this in mind, our greatest preferences in equity are for sectors and regions that we think have a lower vulnerability to rising bond yields. These areas include stocks that our analysis suggests are under-priced such as a selection of companies in Japanese and emerging markets.
This thinking also supports our ongoing preference for commodities, which we think will benefit from the economic recovery with less likelihood of being detrimentally affected by rising inflation or bond yields.
Our general view of assets over the coming months can be summarised as follows:
Any views expressed are our in-house views as at the time of publishing.
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Forecasts of future performance are not a reliable guide to actual results. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.
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