Please find below our interim Investment Market Update as at 12th March 2021.
Blue Sky Investment Market Update
Equities recover some lost ground
After the turmoil of recent weeks, global equity markets have performed well and this is feeding through to our portfolios, although there is always a delay due to the way fund prices work.
Over the last 5 days the S&P 500 in the US has risen by 4% and the Nasdaq (technology index) from its lowest point last Friday, has risen by 6.7%. By comparison, the FTSE 100 at the time of writing this morning has risen by 1.13% over the same period.
So, what’s caused the about turn?
As we have reported over recent weeks, global bond markets were spooked by fears of rapidly rising inflation prospects due to the avalanche of stimulus. Bond yields soared and the underlying value of bond assets plummeted. Remember that bonds do not respond well to rapidly rising inflation, so this spooked investors/traders which in turn led to the value of both equities and bonds falling in value.
We felt that there was an over-reaction and a good excuse for international investors and traders to take some profits and buy in at lower levels. A few months ago, the headlines were anchored on possible deflation and then, suddenly, we are reading articles about us possibly experiencing 1970s hyperinflation. The reality, of course, is somewhere in between.
Roaring inflation unlikely
Data in the US suggests that even despite the $1.9 trillion rush of fiscal stimulus recently approved by Congress, the consensus view is that any pick-up in inflation will rapidly fade. As reported on FT.com; “the break-even market is pricing in some risk the Federal Reserve will be able to engineer inflation to overshoot its target in the near term,” said Tiffany Wilding, a US economist at Pimco. She goes on to add; “there is very little risk of the type of 1970s-style outcomes that some economists and market participants have been alluding to.”
Let us be clear, inflation is a good thing in the current climate. In fact, the Budget last week was focused on encouraging a consumer spending spree. It is estimated that there is an extra £200 billion sat in additional bank deposits here in the UK, due to the public’s decreased spending since the start of the pandemic.
Central banks have made their intent very clear. They want to create inflation and they are relaxed if it overshoots longer term targets for the belief is that inflation will then settle. Jay Powell, the Federal Reserve chairman and Janet Yellen, the Treasury Secretary in the US, have repeatedly played down concerns. Powell recently argued that any jump in inflation would be “neither large nor sustained” and underscored that the economy is still a long way off from the US central bank’s goal of average 2% inflation.
As we know from the news, trade between the UK and the EU has been stalled by bureaucracy, lack of preparation and some bloody-mindedness on both sides of the channel.
This is backed up by recent data which shows that UK exports to the EU slumped by more than 40% in January. In the same month, imports from the EU fell 28.8% compared with December, the Office for National Statistics said on Friday. The FT reported that the combined monthly decline in Britain’s exports and imports was the largest since comparable records began in 1997. The biggest decline in imports from the EU was in cars and pharmaceutical products.
Same news, different headlines
I know I sound like a broken record on this, but I read two headlines today which stated “UK output has the largest contraction since the huge drop in April 2020”. Then another headline in a different publication stated “the UK economy surprises on the upside with better than expected growth”.
Both are true!
The outlook for the UK economy is bullish
I’ll keep this brief as I’ve spoken about this in previous communications, but I like this quote from Dan Hanson from Bloomberg Economics:
“We expect the economy to pick up pace in the next few months as the success of the vaccination programme enables the government to remove restrictions. It’s still set to contract in Q1, but January will probably mark the low point with more timely data indicating the recovery began in February.”
We are now seeing some investment into the UK
Now that the Brexit deal has concluded, the Japanese have been snapping up UK gilts at a record rate. From 2016, the Japanese steered away from UK gilts due to Brexit fears and the instability around the strength of the pound.
The purchasing of gilts in January by Japanese pension funds and life insurers was undoubtedly because they expected the pound to strengthen, which it has. With the recent drop in gilt values, this may also manifest in further investment.
This is an important indicator because there were strong fears that with the UK no longer being the gateway to Europe, a lack of investor confidence in the UK economy may hamper the government’s ability to maintain inward investment into the economy.
By way of context, overseas investors hold just over a quarter of UK gilts and are expected to remain a key source of financing for the country as it aims to raise £296 billion in the financial year beginning next month (source: ft.com).
Negative interest rates unlikely
The expectations that the Bank of England will need to introduce negative interest rates have waned. This is because the economic outlook for the UK has improved. Recent trading activity and the better-than-expected economic data, in harmony with the accelerated vaccination programme and the Budget which encourages spending, has caused a U-turn.
Reasons to be cheerful
After the relative gloom of recent weeks, ironic as it may have appeared where good news on the global outlook was treated as bad news due to fears of inflation, normal service seems to have resumed.
If, of course, we can class anything as normal nowadays!
Have a lovely uplifting weekend.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.