Monthly review and outlook - March 2021
- 10 March 2021
- 5 mins reading time
In February, the month began with optimism over vaccines sending stock prices and bond yields higher at first. As the month wore on, worries grew that a stronger-than-expected economic rebound could lead to central banks reducing some of their support and stimulus measures. As a result, gains in the demand for and prices of higher-risk rated assets, such as equity, were partially reversed. At the same time, lower-risk rated assets, such as government bonds, became more popular, sending their prices up and their yields down.
The very factor that sent stocks rising in the US at the beginning of the month, contributed to their falls a week or two later.
Optimism that the economy could recovery more quickly than had been expected, thanks to financial stimulus and vaccines being rolled out, sent stock prices rising at first. After this had continued for a few days, investors started to worry that central banks might step in to dampen the speed of the recovery by reducing stimulus. This rather took the wind out of investors’ sails, partially offsetting the gains that had been recorded in the earlier part of the month.
It’s worth noting that the trends which had been out of favour during the lockdown benefited the most from the brighter economic prospects: namely energy, financial and industrial stocks. By contrast, technology stocks had a tougher time over the course of the month.
In the UK, stock prices were also supported by the vaccine roll-out. Meanwhile, the pattern of investors moving into stocks that had been out of favour during the lockdowns spread across the eurozone. This came despite a rise in inflation, a fall in economic growth and more political turbulence in Italy.
Elsewhere in the world, it was a similar pattern of rising then receding stock prices over the month as a whole. Indian stocks delivered the most substantial gains after the country’s budget offered more fiscal support to the domestic economy. China was the notable laggard, its stocks closed lower, largely as a result of internet stocks falling out of favour.
In fixed income, the demand for and prices of government bonds fell sharply in early-February, as investor optimism rose, sending money out of lower-risk rated investments. The price and yield of a bond always move in opposite directions, so the yields on US, UK and German bonds rose. To an extent, these rises were reversed towards the end of the month as investors returned to perceived “haven” investments.
The outlier was Italy where government bonds were seen as carrying less risk once former Governor of the European Central Bank, Mario Draghi, was appointed as Prime Minister of Italy.
Corporate bonds that are relatively low-risk i.e. “investment grade” didn’t fall out of favour so rapidly. They were less popular during the lockdowns and have been supported by the financial stimulus programmes of governments and central banks, which have strengthened the ability of companies to meet their bond-payment and other debt obligations.
At the highest end of the risk scale, some high-yield bonds were back in favour in February as investors anticipated a greater level of financial stability among the issuers behind those bonds. That drove their prices up and their yields down.
Commodity prices in general also rose as the prospects of an economic recovery led to expectations of higher production levels and demand particularly for oil, copper and aluminium. As one would expect in this scenario, the demand for precious metals fell as investors moved money out of perceived “havens” such as gold.
Our preference for companies that look set to benefit from the economic rebound continues to be vindicated by share price moves across markets. We think this has further to run given the on-going economic recovery and stimulus policies, particularly in the US.
There is still a good deal of slack (e.g. under-used labour and machinery) in the economy. So, while we foresee a rise in inflation over the coming months, we expect this to be led by a rebound in oil prices. As a result, we are less worried about the overall trend of price rises.
With this in mind, we anticipate that the Federal Reserve, the US equivalent of the Bank of England, will allow inflation to rise unchecked in the short-term while employment numbers recover.
The consequence of all of this is that we continue to prefer equities over bonds. We also have a positive view of the near-term prospects for commodities that look set to benefit from an increase in production levels.
More specifically, we think that the prospects for US banks, Japanese equities and emerging market equities and bonds are all positive.
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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