Commentary on April 2021
The upward momentum in stock-markets continued throughout April and early May as hard data and corporate earnings confirmed the economic revival signalled by earlier surveys. In sterling terms, the US, UK, Asia and Europe all rose by over 4%, and emerging markets by 2% although Japanese shares fell by 2%. Fixed interest bonds were flat. This positive sentiment continued into early May as the release of weaker than expected US jobs data perversely pushed shares higher on hopes that interest rates would remain lower for longer.
The United States posted first quarter economic growth of an annualised 6.4% as it led the recovery in the developed world. Global manufacturing sentiment hit a 10-year high and 77% of the world’s top 1000 companies that had reported results beat analysts’ estimates. Data showed that growth in the Eurozone had contracted in the first quarter, confirming a slip back into a double-dip recession. However, share prices and bond yields rose as traders bet that Europe would soon catch up with its global peers both in terms of the pace of vaccinations and its economic recovery.
April was the month where the base effects from a year ago were expected to lead to a sharp rise in reported inflation but, even so, the strength of the US number surprised investors. The annual rise of 4.2%, the highest since 2008, compared to forecasts in the region of 3.6%. German inflation rose by 2.1% and prices in the UK doubled to a still subdued 1.5%.
The Bank of England’s Monetary Policy Committee (MPC) raised their growth forecast for the year but maintained their stance on not rushing to tighten policy. The MPC forecast a revised growth rate of 7.25% for the year, the strongest peacetime growth rate since 1927. The committee warned that this may be accompanied by “a temporary period of modestly above-target CPI inflation”, but it expected growth and inflation to fall back with inflation around the 2 per cent target in two to three years’ time.
The US Federal Reserve said that the US was making good progress in the battle against the pandemic but reiterated its view that risks to the economic outlook remained and that they were not yet ready to consider tightening policy. Fed’ member Clarida confessed to being surprised at the strong inflation data, saying that the Fed would act if price rises proved not to be transitory. He later returned to the party line that now was not the time to start tapering (reducing the official buying of bonds)!
Market participants are reliant on economic data to help their market view (future earnings, levels of inflation and interest rates) but comparing data from the time of an enforced lock-down to that a of turbo-charged re-opening is fraught with problems. I’ll take two recent examples, both from the US which is further along the recovery path and has a greater sway on global markets.
The first is April’s high-profile release showing how many more Americans had found employment. The figure of 266,000 new jobs fell well-short of the expected 1 million. However, closer analysis showed that the issue was the supply of labour, not the demand. Vacancies were at a 20-year high and companies like Amazon, McDonalds and Burger King had been offering bonus payments to attract prospective employees, in addition to higher wages. One theory over the reluctance of Americans to re-join the work-force is that the unemployment aid is more rewarding than working, up to a certain level of salary. Other considerations are a lack of available childcare and a fear of returning to crowded workplaces. Either way, economists had overlooked it!
The second example is the shockingly high inflation number released in early May. Expectations were already set at around 3.5% to allow for the base effects of last year’s energy prices. But no allowance had been made for across the board price increases, including a 10% rise in used car prices. The scramble to explain this offered a theory that people remained wary of using public transport so invested in a car, using their ‘Stimmies’ (government stimulus cheques). Another view was that car rental firms were rapidly re-stocking ahead of a bumper summer.
While we work our way out of lockdown and annual base effects we might see an increase in stock-market volatility caused by rogue data. With record levels of global debt and speculative trades made on borrowed money we noted the comments from Fed’ governor Brainard who warned that asset valuations were looking stretched and that a “re-pricing event” could be amplified by high levels of corporate indebtedness.
We feel that short-term interest rates are likely to remain at record lows for some time and we will view these setbacks as further investment opportunities.
How are we currently positioned?
Our fixed interest funds continue to have limited exposure to rising yields as we feel that current levels don’t offer sufficient reward for the potential risk of capital loss.
The Jupiter Gold & Silver fund (previously Merian) gained over 11% during the month. Although they dipped in absolute terms over the month, since the start of the year both our Japanese funds, which are hedged back into sterling, have outperformed the unhedged versions by nearly 9%.
We are holding a mix of value and growth stocks but have sought to minimize exposure to US listed FANGS, where valuations have become excessive. Our value stocks have continued to enjoy a strong recovery so far this year. Portfolios were rebalanced last year in anticipation of a more inflationary environment so no further action has been needed in 2021.
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these ‘alternative’ assets are funds invested in gold & silver, infrastructure, agriculture and absolute return strategies.