It is hard to comprehend only a year ago we were all facing such unprecedented times, with the introduction of nationwide lockdowns and some of the highest periods of market volatility we have seen in decades. In March last year, at the peak of the market sell off, the MSCI World index was down 21%, with the FTSE 100 showing a loss of over 33%. Looking at where markets are today, it is evident just how fast markets can shift.
This year commenced with financial markets moving away from safe havens and stocks which provided positive returns through the worst of the pandemic. Instead veering towards the ‘cheap’ stocks, from those companies which are most likely to benefit from the economic recovery as the world slowly comes out of lockdown.
As the chart above shows, the first quarter of 2021 saw a different market environment compared to the final quarter of 2020. Whereas the previous quarter presented us with double digit returns from a very positive market period, this time – whilst equity markets remained largely positive, we experienced more volatility, particularly in the first 6 weeks of the year. Expectations of higher inflation, resulting from the economic recovery, led government bond markets to suffer. This resulted in a much flatter market environment compared to recent months.
In the US, President Biden didn’t waste any time after his inauguration reversing many of his predecessor’s policies. Biden made it clear the rollout of the vaccination program was his priority with a target of 100 million doses to be administered in the first hundred days. This target has since increased to 200 million doses. The new president also put through an unprecedented $1.9 trillion support package, and at the end of the quarter, announced a further $2.25 trillion for the “American Jobs Plan”, putting the onus on corporate taxes to fund this. A move significantly different to that expected from Trump. The vast level of stimulus support has caused fears over inflation, moving 5 year inflation protected treasury bills to 2.5%, which is above the Federal Reserve’s target of 2%.
This rise in US Treasury yields has caused a selloff in the recently loved tech and growth stocks which then trickled into other areas of the market given their newfound size and influence. The markets have seemingly shifted away from favouring the ‘hotter’ growth and tech areas, instead favouring value style companies such as energy and materials businesses. The markets are now pricing in a post pandemic boom, which has led some hard-hit value stocks to reach levels above the pre-pandemic prices. This may be an exaggeration of optimism in the markets, so our investment partners remain cautious, seeking high quality businesses whilst retaining a robust research process.
The vaccine roll out has been successful in the developed regions such as the US and the UK. In other parts of the world, most notably Europe and Asia, it has been slow paired with concerns around the safety and efficacy of some vaccines. In these places new measures of restrictions continue, delaying the much-anticipated economic recovery. To aid in this delay, the European Central Bank has extended the support line and noted if inflation were to experience a rise it would be transitory.
China is headed towards becoming the largest economy in the world, and whilst being the first country to identify Covid-19, it is now concentrating on the next phase in its economic cycle, focusing on growth. With recent crackdowns and tensions around the claims to territory in the South China Sea and Taiwan, financial markets have experienced volatility as seen in the dip in the MSCI Asia index.
FCFP Portfolio Performance
The world is recovering in staggered phases from the negative impact Covid-19 has had on the economy with the UK and US seemingly leading the way. Whilst the recovery seems imminent, our investment management partners emphasise the markets still have plenty of uncertainty priced in. Investors looking towards smoother long-term returns should be seeking to invest in companies with more stable earnings and strong balance sheets. It is believed China and the Far Eastern markets will be the main drivers of growth across global markets, but they also carry additional risks. Our investment partners’ research suggests after the world recovers from the pandemic, we will return to a slow growth, low inflation world. Given the increased levels of government borrowing during the pandemic, we are expecting central banks to take their time in the raising of interest rates.
We expect the focus on productivity will remain in general, and technology will continue to be crucial for any developments in efficiency and productivity. FCFP portfolios continue to have sustainability built into their core investing in these areas, particularly in companies which focus on sustainability and technology simultaneously.
In conclusion, it is our view most investors will return to the high-quality growth companies which have suffered in the last quarter. Our partnered investment managers continue to be on the lookout for high-quality investments. They focus on businesses with stability in their earnings and robust balance sheets, so our clients’ portfolios remain robust in challenging environments.