2021 has commenced feeling very much like an ‘in between’ year; the year where we transition from the COVID dominated lockdowns of 2020, to a point where we start trying to establish new routines with a greater sense of freedom.
The first quarter of the year saw markets adjust with the prospect of a strong vaccine roll out pushing us back towards normality. The quarter also saw some concerns surface based on the effect of the vast amount of stimulus plans and their effect on inflation. This in turn saw a shift in market sentiment, moving away from the previously loved growth stocks into safe havens as discussed last quarter.
Q2 saw the concerns around inflation calm down somewhat and a steadier experience across global markets. The shift from growth stocks into value stocks, which was partially fuelled by a recovery play in bond markets, contributed towards an overall good quarter for investors.
The chart above shows the performance of the major indices over the past quarter. We see the S&P 500, in the US, take first place with the highest returns of the quarter, with European markets and the UK not far behind. Developed Nations saw a less volatile journey over the period in question, primarily led by the global shift into safe-haven stocks.
The US Consumer Price Inflation (CPI) rose to 5% year on year, which was greater than economists had predicted. However, many of the driving factors to these levels may be seen as transitory. Supply shortages due to lower production, combined with a quick move to strong demand as restrictions eased, created a significant mismatch between supply and demand. We expect this to correct over time. Year on year comparisons on all economic data should be taken with a pinch of salt given the year 2020 turned out to be. Q2 in 2020 saw the economy in maximum shutdown, depressing prices with lockdowns being implemented around the world. We should not forget that excess supply and zero demand took some oil futures prices briefly negative last year. UK inflation also rose but is less sensitive to the oil price due to high taxes on refined products and the pound’s strength against the dollar. Central banks on both sides of the Atlantic have expressed the view that inflation is only temporary and, in the second quarter, the markets seem to have dampened their fears to come more in line with this view as the steadier Q2 chart shows in comparison to what we saw in Q1.
The furlough scheme in the UK and similar schemes elsewhere have reduced the level of unemployment in the official statistics, affecting the overall labour figures. As the global economy reopens, there appears to be a shortage of people to fill the jobs. This may moderate as the various schemes are unwound as well as seeing the return of those who are currently shielding or isolating. The concern remains that finding people with the right skills in the right places may be difficult for some months to come, which could potentially slow the economic recovery.
Away from the pandemic, the Chinese authorities continue to prove the COVID-19 era is behind them as tech companies have seen monumental growth in recent years. Statistics are beginning to show that population figures in China may finally be peaking. The economy will continue to grow, and it is our view that Asia will continue to lead economic growth in the years to come. When factoring in the additional political risks present with such nations, positive returns may come with additional volatility.
FCFP Portfolio Performance
2021 Q2 Performance
The chart above shows the performance of our FCFP portfolios over the most recent quarter. The UK centric FTSE All Share performance is used as a point of familiar reference only. Being UK centric, it brings with it significantly more volatility than our portfolios which are geographically diverse. The upturn in global equity and bond markets which took place around mid-May is reflected in the portfolios as shown above. The greater volatility paired with the global shift towards ‘Value’ style strategies fared well for the UK focused FTSE Index. This provided greater returns than the FCFP portfolios over the quarter, though at the cost of a more volatile, and significantly less geographically diverse strategy.
12 Month Performance
To provide an indication on slightly longer term performance, the chart above shows the performance of the FCFP Portfolios over the past 12 months to the most recent quarter end. Despite still being a relatively short-term view, the portfolios are all providing returns in line with our expectations and targets for the relevant risk levels, whilst also showing a significantly lower level of volatility being adopted in all 3 solutions when compared with a less diverse option such as the FTSE All share as shown above. The FCFP portfolios continue to adopt a multi-asset, geographically diverse approach to investing, with a particular focus on seeking high quality investments.
We need to remind ourselves the pandemic is still not over. Whilst we see strong deployment in vaccination roll outs within developed economies such as the UK and the US, many countries lag far behind in terms of getting the population vaccinated. This continues to leave a high risk of further variants developing which could then add additional delays to a full recovery.
‘When America sneezes, the rest of the world catches a cold’ is a commonly used phrase within economics. If something goes wrong in America, the rest of the world feels some impact and the reverse can also hold true. President Biden’s plans for investing within infrastructure and tax raises are expected to support the largest economy in the world. While there are risks at present, we can look forward to a continued longer-term recovery in the global economy, which in turn should translate well for global markets.