Wellesley WeeklyWatch – New highs for Chinese stocks and sterling as vaccine rollout succeeds

23 February 2021

Stock Take

Fresh from the Lunar New Year break, last week saw Chinese stock markets briefly rise above their all-time high – although they later settled at a lower point, investors pushed the CSI 300 Index of Chinese stocks to levels not seen since 2007.

Indeed, China’s economy has been going from strength to strength since the pandemic was finally brought under control last year, notes Martin Hennecke, Asia Investment Director at St. James’s Place.

“While a key driver of the initial rebound was the strong exports, local consumption has been catching up lately, too, with shopping malls well attended and cinemas packed. China’s box office for the 2021 Spring Festival reached over 7 billion yuan – a new record, which has provided investors with confidence as well,” he said.

“That said, I would also highlight that, with valuations having increased in the process, particularly in the more popular sectors – healthcare, technology, and electric vehicles – investors may need to become more selective on stock picks at this point.”

And with Japan’s flagship Nikkei 225 index of companies reaching a level last hit in 1990, the country’s stocks are also enjoying a strong week (see In the Picture below). According to market commentators, the recent resurgence in Japanese stock prices could be partly due to broader optimism in equity markets, as well as positive signs about its economic recovery.

Wall Street slow-down

Breaking the recent run of gains that has seen major US stock indices reach new highs earlier in the year, Wall Street took a pause last week – likely this was partly due to fears that Joe Biden’s $1.3 trillion stimulus package could lead to higher inflation. The president promised an economy that would come ‘roaring back’ after Congress approves the package.

When inflation reaches too high a level, central banks such as the US Federal Reserve, or the Bank of England, usually also increase interest rates. In turn, these higher rates lead to higher borrowing costs for people and businesses, which can lower stock prices in the long run.

It seems unlikely, however, that central banks will tighten policy any time soon. Currently, markets are pricing in a first hike in US interest rates in the middle of 2023, noted Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

A rebounding pound

Last week saw sterling rise to £1.40 against the US dollar – a first since 2018. The pound’s strong start to the year is partly due to the post-Brexit trade deal signed late last year, but it is also down to the success of the vaccine rollout programme in the UK.

As many large companies in the UK derive most of their income from abroad, they often stand to benefit from a weaker pound. For investors in UK equities, the pound’s value is less important than the underlying health of these companies, as well as their future prospects.

While the UK’s immediate future looks positive, it is important to remember that the road to recovery will be a long one. Official numbers released on Friday showed a slump in UK manufacturing, as well as wounded retailers, thanks to the latest national lockdown.

The road to freedom?

Yesterday, Boris Johnson set out his roadmap out of lockdown in England, with five phases lasting until 21st June, at the earliest. The first notable date is less than two weeks from now, on 8th March, when schools will reopen, with mass testing and mandatory face masks in secondary schools. Later in the month, outdoor sports and outside gatherings with the ‘rule of 6’ are expected to be permitted.

Each major ‘unlock’ date will be at least five weeks after the preceding date, to allow the government to observe the effects of the relaxing of restrictions. The Prime Minister stressed that progressing along the schedule is subject four tests: the success of the vaccine rollout, evidence of vaccine efficacy, an assessment of new variants, and keeping infection rates below a level that could put unsustainable pressure on the NHS. With 17.7 million UK adults now having received their first dose of the vaccine, there are certainly reasons to be optimistic.

Business owners will no doubt be keeping a keen eye on each stage of the roadmap to see what it means for their company and employees. With the reopening of non-essential retail, hairdressers, domestic holidays (for one household) and pub gardens earmarked for 12th April, spring could mark the start of recovery for many UK businesses. That said, full hospitality, large events and international travel are last on the list.

Has the game stopped?

Finally, the key actors in the GameStop saga appeared before the US Congress last week.

Lawmakers sought to understand why Robinhood, a popular stock-trading platform, halted the trade of GameStop after its price skyrocketed following discussions about it online. They also wanted to understand the phenomenon of amateur investing, by exploring the ‘gamification’ of trading and any dangers associated, as well as whether online discussions about stock prices could be considered as market manipulation.

It has, at least, highlighted the growing influence of amateur investors on the stock market. The issue reverberated around the wider market when it peaked late in January and caused an increase in volatility.

The meeting was also striking for bringing together two very different groups of people – on one side: politicians, on the other: online forum users. ‘Roaring Kitty’, a popular YouTuber whose video analysis of GameStop helped spark the phenomenon, clarified to Congress that “I am not a cat” – probably a first in the chambers of Capitol Hill!

Wealth Check

The 0.7% inflation increase in January1 is nothing compared to what is expected by the end of this year. Economists forecast that inflation could breach 2% by the end of the year2, as the successful vaccine rollout aids recovery, and higher production costs are passed on to the consumer. Additionally, the Bank of England will likely prioritise supporting economic growth over reducing inflation for the next few years.

It’s another blow to cash savers, who will see their real returns drop further into negative territory. The average interest rates for savings accounts fell again last month, including those for Cash ISAs, according to Moneyfacts.3 This dashes the hopes of savers ahead of ‘ISA season’ – the period in the run-up to the end of the tax year when ISA providers traditionally up their rates to attract savers who haven’t used their allowance.

This outlook for inflation and interest rates, along with the looming 5th April deadline, might be the trigger to review whether your ISA savings could be working harder. With over £280 billion sitting in Cash ISAs4, much of which will have been there for more than five years, cash has become part of savers’ longer-term investment strategy, instead of simply the home for ‘emergency’ money. It also means savers may be wasting the opportunity provided by their ISA allowance to generate inflation-beating returns and keep future financial plans on track.

Sources:

1Office for National Statistics figures, February 2021
2Capital Economics, UK Economic Outlook, January 2021
3Moneyfacts UK Savings Trends Treasury Report, February 2021
4HMRC, Individual Savings Account (ISA) Statistics, June 2020

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested. 

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

In the Picture

Japanese stocks followed world equity markets higher last week, reaching levels that they last hit three decades ago. The country launched its vaccination programme last week, with hopes that the delayed Summer Olympics might be able to go ahead normally this year. 

Past performance is not indicative of future performance.

The Last Word

“These results are very encouraging and have given us great reasons to be optimistic for the future.”
– Professor Aziz Sheikh, Lead Researcher at Public Health Scotland, on new data showing that COVID-19 vaccines significantly reduce hospitalisations.

The information contained is correct as at the date of the article.

BlueBay is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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