13 April 2021
The UK passed the next milestone of easing its lockdown restrictions yesterday, while its FTSE 100 index of large public companies benefitted from a buoyant week. Shops, gyms and pub gardens reopened after a lengthy lapse in action, and markets seem to be anticipating some renewed activity to help stimulate economic recovery. Many people will be relishing the opportunity to embrace a sense of normality once again at this key turning point in the government’s ‘roadmap’.
US equities experienced a strong week too – perhaps signalling investor confidence in the country’s economic recovery. It was likewise a positive week for the European market, in spite of comparative setbacks with its vaccination programme. Indeed, European stocks hit a new high last week, with the Stoxx Europe 600 index negating the losses that it has suffered throughout the outbreak.
The inflation situation
The International Monetary Fund stated last week that it foresees minimal long-term economic damage as a result of the pandemic – at least in advanced economies. Acknowledging that there will be a disparity in the future, it said it anticipates at least two years of rapid growth, with the world economy growing by 6% in 2021 and 4.4% in 2022.
During talks about the global recovery last week, the Federal Reserve (the US central bank) released the minutes of its March meeting, at which it reviewed the stance for the US market. The majority of the attendees considered that the risk of unforeseen high inflation was about the same as the risk of more low-key levels, giving a sense of a ‘broadly balanced’ outlook, according to the release.
Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, and his team are scrutinising the data for clues about its direction. He wrote:
“It may be necessary to await data a little later in the quarter before the inflation dynamic becomes somewhat clearer.”
Ever since vaccine programmes were rolled out last year, markets have been assessing if a fast economic recovery could lead to a period of higher inflation. Too high a growth might eventually mean that governments and central banks change their policies in response. These policies (for example, low interest rates) have upheld asset prices since the crisis broke out last year.
Certain corners of the market are fearful that higher interest rates could test the share prices of the companies whose valuations have swelled over the past year. For instance, some large technology companies are trading at high valuations compared to their earnings.
This highlights how crucial it is to maintain a diversified portfolio of investments, wrote Ugo Montrucchio of Schroders, Manager of the St. James’s Place Managed Growth fund. He proposes that the so-called ‘bubble’ in technology stocks is likely to be less relevant to the largest companies with historically strong earnings, but could be applicable to ‘second tier’ technology stocks, whose revenue projections are overzealous.
“A way to navigate through what may well turn out to be a bubble is to diversify your exposure and cast your investing net as wide as possible.”
‘Tis the season
Investors will be searching for clues this week regarding the health of public companies in their imminent results releases. The ‘earnings season’ is an opportunity for companies to disclose details about their processes, and an important time for investors trying to assess their prospects.
Many investors in the US will be keeping a furtive eye on reports coming in this week from large companies, such as banks and airlines. Needless to say that a lot of companies will report higher earnings over the last three months than during the first quarter of 2020 (which they are compared to).
But what is perhaps more relevant is that they will include information about the level of damage brought about by COVID-19, or by the computer-chip shortages that have been causing problems for manufacturers and technology companies of late. Extraordinary results in either direction can be expected to move markets, this week and beyond.