16 March 2021
The sky was the limit for large US tech businesses on the stock market last week – welcome news for fast-growing businesses, following a couple of weeks where they had noticeably lost their shine.
The S&P 500 index of large US companies rounded off Thursday with a personal best. However, the trend seemed to have tailed off towards the end of the week, with technology stocks closing lower once again.
On Thursday, President Biden passed a $1.9 trillion stimulus package for the US economy, meaning that any American earning less than $75,000 a year will receive $1,400. The deal will also include an extension of jobless benefits and a child tax credit that is set to benefit millions of people.
Investors are curious to know what effect the package will have on equities and other asset classes. How will people spend the money given to them, and what will the impact be on financial markets?
Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, said that once the cheques arrive with US households, they should spur on economic activity.
“Living life under lockdown creates disincentives to spend – for example, who wants to spend on new outfits to dress up when there is nowhere to go? But this is changing as lockdowns dissipate. Furthermore, the current round of cheques is more targeted towards lower-income households, where the propensity to spend tends to be greater,” he added.
Some investors have growing concerns that an increase in spending could drive higher inflation. This worry would account for the recent tremor in technology shares in recent weeks – the fear is that said shares will not respond as well when economies start to open up again.
With a sense of normality taking shape on the horizon, so-called ‘value’ stocks have performed better than their fast-growing equivalents. Some investors speculate that ‘value’ investments will go on to perform better than ‘growth’ stocks, whose resilience has made them the shining stars of the pandemic.
“We think that value will continue to outperform growth in the US, and potentially by a significant margin,” suggests Capital Economics. It raises the fact that, in spite of the recent comeback in value stocks, the MSCI USA Value Index has underperformed its growth counterpart by approximately 20% since the beginning of 2020.
For investors who have depended heavily on growth stocks performing well, such as those investing in index-tracking funds controlled by the tech giants, the so-called ‘rotation’ that has been seen in markets, from growth to value investments, might be a cause for concern. However, if your portfolio blends different styles, any such rotation in markets should give you a look-in, rather than keep you out.
Taken at face value?
In the UK, figures from last week revealed that GDP dropped by 2.9% in January. The plunge is just another indicator of the economic damage brought about by the current lockdown.
Furthermore, new data flagged up that there was a 41% drop in UK exports to the European Union in January, which Suren Thiru, Head of Economics at the British Chambers of Commerce, commented was an “ominous indication of the damage being done to post-Brexit trade with the EU by the current border disruption”.
That said, investors in UK equities are more interested in the health of the businesses being invested in, as well as the performance of their share prices and other factors such as dividend payments.
“There are already some very encouraging signs that things are beginning to improve,” stated Ian Lance of RWC Partners, manager of the St. James’s Place Equity Income fund.
He goes on to point out that the UK market has started 2021 on a positive note, and that, at their current prices, UK stocks are better value than their equivalents across the globe.
“Over the last 50 years or so, the UK has on average traded at a 17% discount to the stock markets of the rest of the world. And today that discount is 45% – so you literally have to go back to the 1970s to find a time that the UK market has been as cheap as it is today.”