Monthly review and outlook - June 2021
- 02 July 2021
- 5 mins reading time
In May, the vaccine roll out continued to pick up pace in several European countries, and restrictions were further loosened. The energy, financials, consumer-staples and discretionary sectors led the advance, while healthcare, IT and utilities lagged.
Global equity prices were broadly higher, while the demand for and prices of corporate bonds rose faster than those of government bonds. This was driven by signs of accelerating economic growth.
Commodities gained, with precious metals the best-performing index component.
UK stock prices increased, supported by growing confidence around the rebound of the country’s economy. Despite concerns about the Indian variant of Covid-19, the Government pushed ahead with the latest easing of lockdown measures, however full unlocking has been delayed. Meanwhile the Bank of England announced plans to slow its bond-buying programme, which is designed to stimulate economic growth, but also potentially fuels inflation.
US equity prices also rose. Similarly to the UK, this was due to economic recovery appearing to accelerate. The strongest performance was in sectors closely tied to economic growth, such as oil companies and miners. Consumer discretionary, which includes car manufacturers, hasn’t performed as strongly, partly as a result of a shortage of semi-conductors, which has caused shutdowns in auto production.
Elsewhere in the world, performance was mixed. Indian stocks delivered the best returns despite rising infection numbers. Gains were held back in China though. This was caused by the slow rollout of vaccines and worries held by regulators over the growing influence of the country’s technology sector.
The demand for and prices of government bonds didn’t change much, while those of European government bonds fell. This was because of an increased appetite for higher risk-rated investments such as equities. Investors pulled money out of government bonds and put them into equities where they had greater confidence of rising returns. The European Central Bank (equivalent to the Bank of England) indicated that it might reduce its stimulus measures for the economy by increasing interest rates, reducing the bond-buying programme, or both.
In corporate bonds, the demand for and prices of lower-risk rated US corporate bonds rose, while that for the European equivalents was flat.
In terms of higher-risk rated bonds, demand increased, while investors sought investments that paid higher yields.
There were broad price gains across most commodities. Gold prices rose due to it traditionally holding its value when inflation rises. The demand for minerals and other commodities rose as the prospects for manufacturing improved.
Over the past 12 months, we have preferred stocks that tend to perform well when the economy is strong. These include construction and manufacturing companies. However, we have seen considerable growth already and might be due for a period of consolidation during which growth slows.
The Federal Reserve may start to reduce its financial stimulus programme as the economy continues to grow.
For equities, valuations are influenced by a rise in both corporate earnings and bond returns. On the one hand, if corporate earnings are rising, then the stimulus programme is clearly doing its job, which could prompt a reduction in stimulus.
On the other hand, as more money goes into the economy, inflation rises resulting in less demand for bonds, and consequently, an increase in yields. However, as yields on bonds rise, they become more attractive to investors. Assessment of these competing forces needs to be considered.
We have concluded that corporate earnings should be sustained which could help to protect equity price valuations.
The biggest risk to this view is if inflation goes too high too soon, economic stability will be upset by forcing wages to go higher. This could force the Federal Reserve to taper its quantitative easing programme. For now, we are monitoring trends in the labour market as signs of rising wage pressure, which would further increase inflation, and be a cause for concern.
Within equities, we’ve increased our preference towards European equities, while moving away from our preference for US small companies. We retain a neutral view of emerging markets while Covid-19 continues to pose a significant challenge to a number of economies.
We continue to monitor the unlocking of global economies and the effect that this may have on equities and fixed income investments.
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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