The Multi Asset Process

April 2021 Market Review

While ongoing reflation and economic recovery created a positive backdrop for risk assets in April as more countries open up, pushing stocks to new highs over the month, events in India have shown Covid-19 is still having a devastating impact around the world.

Now many stock markets have rebounded all the way – and more in some cases – from the falls at start of the Covid crisis, attention has been shifting to potential policy tightening and all eyes, yet again, were on Federal Reserve chair Jerome Powell’s post-meeting press conference to detect hawkish, or less dovish, comments. For now, the stance remains staunchly supportive, albeit recognising improving conditions, with no mention of rate rises and a commitment to continue buying bonds until there is ‘substantial further progress’ toward maximum employment and price stability goals.

As always, the devil lies in that ‘substantial further progress’ detail and with US GDP growing 6.4% annualised in Q1, and predictions for the second quarter closer to 10%, economists are suggesting this will be the last Fed meeting before officials have to start discussing how and when to start unwinding these extraordinary policies. Reinforcing our view that stock market corrections are likely this year, one commentator claimed the US economy is ‘busting out all over’ and, with echoes of the tantrum in 2013, some tapering of asset purchases will soon be needed. This delicate balance was clear when markets dipped on the back of comments from Treasury Secretary Janet Yellen that rates may need to rise to ensure the economy does not overheat, and the former Fed chair quickly clarified to say she is neither predicting nor recommending hikes.

For his part, Powell asserted once again that recent increases in inflation are transitory, dismissing worries about price surges and anecdotes of labour shortages, and implying policymakers are prepared to run the economy hot for a while. Meanwhile, President Biden unveiled a $1.8 trillion spending plan targeted at American families, adding to economic optimism.

For all the concern about inflation, our view is that we have already seen it in asset prices via the ‘gamification’ of investing, with huge rises in stocks like Tesla and corners of the market such as Bitcoin. Liquidity levels in markets (alongside the base effect of higher energy prices and pent-up consumer demand) could create a short-term warming up of inflation in spring, as central banks have warned, but we do not currently see conditions forming for persistent higher prices over the longer term. Wage price inflation has traditionally been key to higher overall levels but the forces of globalisation and technology have kept this down in recent years and, again, we believe any meaningful pick-up here is unlikely over the medium to long term.

While US equity indices hitting all-time peaks has become commonplace over recent years – the S&P 500 and Dow Jones both breached significant barriers in April of 4000 and 34,000 respectively – the MSCI World also climbed to a new record over the month and the FTSE 100 joined in as it got back above 7000. This is very different to last year when the UK was conspicuous by its absence from soaring markets, with the finance and commodity stocks that weighed on 2020 returns among the best-performing sectors over recent months.

In stark contrast to those dreadful scenes from India, official figures even stated the UK is no longer in a pandemic, with the vaccination programme reducing symptomatic Covid infections by up to 90% – although, after the last year, most people will likely want more practical evidence before fully embracing that assessment. Among encouraging signs that will help towards this, UK manufacturers have recorded the sharpest rise in optimism since 1973 amid growing demand as lockdown measures relax, according to the CBI.

Predictions released over the month claim the UK’s economy will grow at the fastest rate since the Second World War this year, based on that cocktail of successful vaccine rollout, pent-up demand being released and ongoing fiscal and monetary support. The EY ITEM Club (standing for Independent Treasury Economic Model) expects GDP to grow by 6.8% in 2021 – a sharp upgrade on the 5% estimated in January – which would mark the fastest rate since 1941. No one will need reminding the UK economy shrank 9.9% in 2020, the worst in the G7, and this growth would pull the country back to pre-pandemic levels by the middle of 2022.

As the economy continues to open up, assuming we avoid any virulent new strains of Covid, a key test for ongoing positive sentiment will come with the end of the furlough scheme in September. The unemployment situation has been very different in this ‘recession’, hitting areas such as hospitality and leisure as these had to shut down, but leaving many so-called white collar roles largely untouched, apart from working from home. Broadly, and obviously, speaking, we hope the removal of furlough schemes coincides with economies reopening and staying that way; the risk is if reopening is slower than predicted (which may have to be faced in Europe) and companies close for good. We can only wait to see how far temporary unemployment gives way to permanency and, if the situation is worse than predicted, we would expect further government support given what they have done over the last year.

Maintaining its bullish tone, the EY ITEM Club is predicting unemployment will peak at lower than previously expected levels as companies start hiring again in step with relaxation of lockdown. Using the Treasury’s economic models to produce its forecasts, the Club said it expected unemployment to reach 5.8% by the end of 2021 – down from the 7% jobless rate predicted in January – and as low as 4.5% by the end of 2022. To give context, the rate was 4% before the pandemic struck.

We remain cautious on the US and it is worth pausing to consider some of the numbers here: since the market low on 23 March 2020, the S&P 500 has rallied more than 80%. Going back 100 years, it has traditionally taken the Index around a decade to double in value, whereas the climb from 2000 to 4000 has come in less than seven years. Such rapid growth again suggests scope for pullbacks and we have already seen this happening in the most expensive (tech-focused) corners of the market.

That said, first-quarter earnings for S&P companies are expected to rise more than 30% from a year ago, the highest since late 2010 when the economy was coming out of the global financial crisis, and there is a growing sense that, despite challenges to come, investors are potentially underestimating economic and earnings recovery. More than three-quarters of S&P 500 companies that have reported results so far have beaten analysts’ estimates according to Bloomberg data and, towards the end of the month, the market was poring over data from the FAANG mega-caps for clues on how these more growth-oriented companies are faring in the broader value-led recovery. Fairly well if Google’s parent company Alphabet is any indication, which more than doubled profits to a record $17.9 billion in the first quarter as residual lockdowns continued to drive a surge in use of digital services. Apple, meanwhile, posted Q1 revenue of $89.6 billion, up 54% year over year.

We remain broadly positive on risk assets (equities apart from the US and high yield bonds) and are currently a four in terms of our target tactical allocation, where five is most bullish. We are skewed towards equities that have traditionally benefited from an economic rebound, including small caps, Asia/emerging markets and Japan, and also have a value tilt. While we favour equities overall, however, we always remind investors that nothing goes up in a straight line: corrections are a healthy part of properly functioning markets and will continue to give us opportunities to invest.

Over the rest of 2021, more speculative tech companies seem the most obvious area for selloffs given their priced to perfection valuations. Despite strong results from several household names, some of the sector’s stalwarts have been hit in recent days, with Microsoft dropping after failing to deliver the blockbuster results analysts were seeking.

We continue to be cautious about predicting a sustained resurgence for value stocks but the case does seem stronger than it has for many years, with rising bond yields, for example, tending to favour old economy companies and punish growth stocks. Admittedly, we were early into small caps and value last year as momentum continued its strong run but, as the last few months have shown, it is typically better to be too early than too late, especially when it comes to market rotations.

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Tuesday, May 11, 2021, 9:03 AM