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The Multi-Asset Process

May 2021 Market Review
Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Rising inflation remained a key focus throughout the month and there was some tech-centred selling in May as a result, with investors continuing to exit longer duration growth companies and adding fuel to the ongoing value rotation.

US inflation hit a 13-year high in April, rising to 4.2%, and consumer prices also doubled in the UK to 1.5% as these economies continue to re-open and the base effects of 2020’s slump feed through. Over recent months, central banks have warned this was coming, with Federal Reserve chair Jerome Powell, for example, insisting the Bank was expecting a short-term transitory spike over the summer and has the tools to deal with inflation if it does run out of control without throwing the economic recovery off track.

As has become the norm, market watchers pored over the minutes from the Fed’s April meeting to find signs of hawkishness, and the notes indicated officials may finally be open to discussing adjustments to the pace of bond purchases if the US economy keeps progressing at its current pace. The Bank also reiterated the economy remains far from its twin goals of full employment and price stability, however, and underscored the commitment to handle any policy transition with care suggesting a more cautious approach than taken by former chair Ben Bernanke, whose discussions about withdrawing support sparked 2013’s taper tantrum.

Officials were out in force towards the end of the month, with governor Lael Brainard, Atlanta Fed President Raphael Bostic and St. Louis’s James Bullard all citing bottlenecks and supply shortages as the key factors behind higher prices as the pandemic recedes and pent-up customer demand is unleashed, but stressing most of those price gains should prove temporary.

Both the Fed and Bank of England are clearly willing to tolerate a cost-push spike in inflation as the global economy recovers but, while bond markets seem to have settled after recent selloffs, there are lingering concerns this could give way to more enduring demand-pull wage inflation last seen in the 1980s. We are confident inflation will drop away in the medium term and conditions are not forming, for now, that pave the way toward more persistent rises. Wage inflation remains one of the most significant factors in the overall picture but technology and globalisation have provided a deflationary offset in recent years and we do not believe this is about to change. 

Rising commodity prices are a key component of the current spike, with a considerable rally this year, and there are signs China is looking to get this situation under control. The country is a major factor behind the rally, spending $150 billion on crude oil, iron ore and copper ore over the first four months of 2021 as part of a huge construction boom, but officials are wary of another rapidly inflating bubble and attempting to reduce some of the froth driving markets. China’s National Development and Reform Commission has said it will show zero tolerance for any monopoly-like behaviour or hoarding, threatening severe punishment for violations ranging from excessive speculation to spreading fake news.

A further, more local, factor to consider is the Brexit effect and we saw ongoing fallout in May as China replaced Germany as the UK’s biggest single import market for the first time on record, partly fuelled by demand for Chinese textiles used for face masks and PPE. ONS data show that goods imports from China to the UK have increased by 66% since the start of 2018 to £16.9 billion in Q1 2021, while imports from Germany fell by a quarter over the same period to £12.5 billion. Figures also revealed that UK trade with the EU collapsed by nearly a quarter at the start of 2021 compared with three years earlier, as Brexit and Covid-19 disruption hit exports. As we have said before, the pandemic continues to dominate at present but as that recedes, over the longer-term the impact from Brexit remains the big unknown for the UK.

Overall, there is a growing feeling that markets had a fairly easy ride in the first stage of economic recovery from the pandemic, with recent peak data driving new market highs, but more volatility is expected over the summer and equities could remain rangebound as investors wait to see what the Fed and other central banks decide. At the very least, expectations of higher prices are becoming more commonplace and while unlikely to panic policymakers into aggressive tightening, it does signal crisis-level monetary policy is no longer essential.

Highlighting this shifting sentiment, recent Bank of America Fund Manager surveys have showed the pandemic is no longer seen as the number one tail risk – although it should be noted this was before the situation in India reached crisis levels and concerns about the Indian variant called the UK’s freedom roadmap into question. Around a third each cited higher-than-expected inflation and a tantrum in the bond markets as greater worries: a net 93% of managers in the March survey expected higher inflation in the next year, which is an all-time high.

Elsewhere, three-quarters also expressed concerns that Bitcoin is in bubble territory and the cryptocurrency had another volatile month as long-term advocate Elon Musk complained about the fossil fuel usage implied by its energy needs and announced Tesla will no longer accept the world’s biggest digital currency as payment. Solidifying concerns that Musk has far too much influence in this arena, more supportive tweets later in the month, suggesting he supports cryptocurrencies against fiat money, caused Bitcoin prices to soar again.

Meanwhile, BofA also warned stock market sentiment is nearing ‘euphoric’ levels and is close to giving clients the sell signal. Its latest sell side indicator, which measures bullishness by tracking strategists’ average equity allocation, is at a 13-year high, which the group said is a reliable contrarian indicator. For our part, we remain positive on risk assets but always stress pullbacks are an important part of healthy equity markets and would note that, despite some volatility amid selling over May and back-to-back negative weeks, the S&P has not seen a 5% drop in six months; on average, these tend to occur three times a year.

As part of our latest target tactical allocation review (ranking asset classes from one to five, with five the most bullish), we pared back our stance on Japanese equities slightly, moved more positive on UK smaller companies and neutral on the US, and are slightly more constructive on UK gilts and global government bonds. Japan is still among our favoured cheap equity markets and we feel the country, with its high proportion of old economy cyclical and value stocks, is well positioned amid the ongoing global reflation trade. We moved our target TAA score down from five to four, however, on concerns about the country’s slow progress on Covid vaccinations, which could impact domestic recovery in the second half of this year.

For UK small companies, we moved from three to four as the recovery continues, with predictions claiming the economy will grow at the fastest rate since the Second World War this year, based on a cocktail of successful vaccine rollout, pent-up demand being released, and ongoing fiscal and monetary support. A strong rebound in UK small caps is already under way but there is further scope for mean reversion with Brexit uncertainty disappearing, sterling normalisation and M&A activity.

As for the US, our long-standing concerns about valuations remain intact, especially at the more speculative tech end, but 2021 earnings have surprised on the upside and the market is starting to offer better value after a recent cooling off. The key question remains whether the US market is still prone to a deeper correction after the great acceleration of the last year and we would suggest a shift towards ‘real world’ rather than virtual interaction will put further pressure on technology revenues, and share prices have already discounted those better-than-expected earnings. In addition, Washington Attorney General Karl Racine announced plans to sue Amazon on antitrust grounds, alleging its practices have unfairly raised prices for consumers and suppressed innovation, and it remains to be seen what impact this has on the company’s share price and the sector overall.

Finally, we moved gilts and global government bonds from one on our scale up to a two: while still towards the more bearish end, this reflects bond yields grinding upwards over recent weeks on the back of those inflation concerns and looking slightly more attractive.

Understand common financial words and terms See our glossary
Key Risks 
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Some of the Funds and Model Portfolios managed by the Multi-Asset Team have exposure to foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The majority of the Funds and Model Portfolios invest in Fixed Income securities indirectly through collective investment schemes. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. Some Funds may have exposure to property via collective investment schemes. Property funds may be more difficult to value objectively so may be incorrectly priced, and may at times be harder to sell. This could lead to reduced liquidity in the Fund. Some Funds and Model Portfolios also invest in non-mainstream (alternative) assets indirectly through collective investment schemes. During periods of stressed market conditions non-mainstream (alternative) assets may be difficult to sell at a fair price, which may cause prices to fluctuate more sharply.


This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 

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