The global economy has continued to recover strongly in the second quarter of 2021 as vaccination programmes have been accelerated and unprecedented financial support from governments and central banks has continued. In recent weeks this has resulted in a reduction in volatility and a relative calm in markets. Strong market performance has been based on a consensus of global growth as economies recover from the pandemic, transitory inflation and very supportive central banks.
Equity Markets March Higher
The US equity market has continued to lead the world in Q2 2021 hitting fresh highs registering an increase of over 7% with continental European bourses close behind. Global equities overall have delivered their best start to a year since 1998. The US economy is forecast to grow at 7% in 2021 and above 3% in 2022.
Bank of America analysts have estimated that global fiscal and monetary stimulus now runs at $30.5 trillion over the last 15 months, an amount equivalent to China and Europe’s economies together. Much of this stimulus has found its way into equity markets. Despite concerns about coronavirus in emerging markets, even here, investors have seen a positive return over the last 3 months. Amongst major markets, Japan has lagged with a slow vaccination programme and concerns from a health perspective about the Olympic games scheduled for July.
Febrile Markets
It has notable that equites are not the only stand-out performers this year. Oil has surged by 45%, its best start to a year since 2009. Other commodities have spiked too, timber up around 30%, copper 20% and agricultural staples showing double digit increases. Some investors believe this is part of a new commodity ‘supercycle’, although most likely the supply and demand imbalance is just a result of the bounce back from the pandemic and may ease over the next year. The UN Climate Change Conference (COP26) in November may also impact commodities depending on the nature of any agreements reached.
Speculation has been widely reported in respect of cryptocurrencies, which remain unregulated and so-called ‘meme’ stocks which amateur traders have favoured (these are stocks which have seen dramatic and volatile price movements mostly fuelled by amateur investors on social media).
Market Rotation to Value
Over the last 3-months, the performance of equities has polarised as ‘value’ stocks have continued to outperform ‘growth’ stocks, such as technology. Strong sectors which have rallied include financials, industrials, energy and mining. These sectors tend to do better as inflation and interest rates tick upwards, provided of course inflation is kept under control and economic growth is maintained.
Bond Markets Face Headwinds
Quality sovereign bonds have delivered their worst performance for 8 years in the first half of 2021. US inflation is currently running at over 5%, which is much higher than the average of 3% over the last century. This is leading to more pressure for a winding in of the extraordinary stimulus measures and for interest rates to be raised sooner than had previously been expected. This climate is challenging for bonds, where prices move inversely with expectations about future inflation and interest rates. The US Federal Reserve is now expected to begin increasing interest rates a year earlier in 2023 instead of 2024. Quantitative Easing (QE) in the US is also likely to be curtailed in the coming months from the current $120 bn monthly bond purchases.
Investment Outlook
Economic Recovery in Progress
The global economic recovery should be sustained in the second half of the year as coronavirus is increasingly brought under control around the globe and lockdown restrictions are eased. Latent consumer demand is robust and this should continue to support company earnings in the coming months. Value stocks in particular have outperformed growth stocks this year and this trend is likely to continue in the second half of the year. This may favour selective investments in Europe and the UK. The UN Climate Change Conference may result in some important announcements creating attractive investment opportunities, particularly in respect of green infrastructure investments.
More Volatility
The second half of 2021 is likely to see greater volatility in markets as inflation concerns persist and pressure grows on central banks and governments to withdraw economic stimulus. A surge in the incidence of the Delta variant or other new variants could also spook investors. Higher volatility is also expected as some valuations have become stretched, particularly in the US. Bond markets face headwinds as central banks plan to rein in bond buying programmes and raise expectations of moving to a policy of a gradual increase in interest rates.
German citizens go to the polls in September marking the end of Mrs Merkel’s fifteen years in power. Whilst the frontrunner, Mr Laschet represents steady continuity, the Green party is likely to present a challenge. Most importantly, looking ahead, Germany and the wider EU need to define their ongoing relationship with both Russia and China. Both these nations present political difficulties for Germany and the EU, but the Nord Stream 2 pipeline from Russia secures Germany’s energy needs and China is Germany’s largest export market.
Technology will Continue to Drive Growth
Once the economic bounce has run its course later this year, economic growth globally is likely to return to trend with a more pedestrian level of growth in 2022 and beyond. The transformation of every area of our lives by technology will continue, whether the drive for clean energy, protecting the climate, digital innovation or medical science; as such, companies delivering higher levels of growth will continue to command a premium, particularly when growth becomes more scarce as taxes begin to rise in 2023. Analysts are forecasting strong growth in earnings from technology companies over the next two years.
Balancing Coronavirus Control with Economic Impact
In the short-term, the main concern remains variants of coronavirus, the efficacy and the pace of the rollout of the global vaccination programmes, as well as the risk of further virus mutations, so the global economy can fully recover. There is also the ongoing balancing act of central banks and governments getting the timing right of reducing stimulus measures as growth returns. This is imperative so as to avoid stifling growth on the one hand, whilst avoid the global economy overheating on the other hand – maintaining the ‘Goldilocks’ scenario.
Looking further ahead, the prospect of higher taxes and high levels of debt are likely to impact future growth like a deadweight on the economy. But, the outlook for now remains positive as optimism about the recovery continues to dominate the agenda.
Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@SeabrookClark.co.uk
Market Overview & Outlook Quarter 2 2021 (1 April – 30 June 2021) Equities Hit New Highs
Matthew Clark
The global economy has continued to recover strongly in the second quarter of 2021 as vaccination programmes have been accelerated and unprecedented financial support from governments and central banks has continued. In recent weeks this has resulted in a reduction in volatility and a relative calm in markets. Strong market performance has been based on a consensus of global growth as economies recover from the pandemic, transitory inflation and very supportive central banks.
Equity Markets March Higher
The US equity market has continued to lead the world in Q2 2021 hitting fresh highs registering an increase of over 7% with continental European bourses close behind. Global equities overall have delivered their best start to a year since 1998. The US economy is forecast to grow at 7% in 2021 and above 3% in 2022.
Bank of America analysts have estimated that global fiscal and monetary stimulus now runs at $30.5 trillion over the last 15 months, an amount equivalent to China and Europe’s economies together. Much of this stimulus has found its way into equity markets. Despite concerns about coronavirus in emerging markets, even here, investors have seen a positive return over the last 3 months. Amongst major markets, Japan has lagged with a slow vaccination programme and concerns from a health perspective about the Olympic games scheduled for July.
Febrile Markets
It has notable that equites are not the only stand-out performers this year. Oil has surged by 45%, its best start to a year since 2009. Other commodities have spiked too, timber up around 30%, copper 20% and agricultural staples showing double digit increases. Some investors believe this is part of a new commodity ‘supercycle’, although most likely the supply and demand imbalance is just a result of the bounce back from the pandemic and may ease over the next year. The UN Climate Change Conference (COP26) in November may also impact commodities depending on the nature of any agreements reached.
Speculation has been widely reported in respect of cryptocurrencies, which remain unregulated and so-called ‘meme’ stocks which amateur traders have favoured (these are stocks which have seen dramatic and volatile price movements mostly fuelled by amateur investors on social media).
Market Rotation to Value
Over the last 3-months, the performance of equities has polarised as ‘value’ stocks have continued to outperform ‘growth’ stocks, such as technology. Strong sectors which have rallied include financials, industrials, energy and mining. These sectors tend to do better as inflation and interest rates tick upwards, provided of course inflation is kept under control and economic growth is maintained.
Bond Markets Face Headwinds
Quality sovereign bonds have delivered their worst performance for 8 years in the first half of 2021. US inflation is currently running at over 5%, which is much higher than the average of 3% over the last century. This is leading to more pressure for a winding in of the extraordinary stimulus measures and for interest rates to be raised sooner than had previously been expected. This climate is challenging for bonds, where prices move inversely with expectations about future inflation and interest rates. The US Federal Reserve is now expected to begin increasing interest rates a year earlier in 2023 instead of 2024. Quantitative Easing (QE) in the US is also likely to be curtailed in the coming months from the current $120 bn monthly bond purchases.
Investment Outlook
Economic Recovery in Progress
The global economic recovery should be sustained in the second half of the year as coronavirus is increasingly brought under control around the globe and lockdown restrictions are eased. Latent consumer demand is robust and this should continue to support company earnings in the coming months. Value stocks in particular have outperformed growth stocks this year and this trend is likely to continue in the second half of the year. This may favour selective investments in Europe and the UK. The UN Climate Change Conference may result in some important announcements creating attractive investment opportunities, particularly in respect of green infrastructure investments.
More Volatility
The second half of 2021 is likely to see greater volatility in markets as inflation concerns persist and pressure grows on central banks and governments to withdraw economic stimulus. A surge in the incidence of the Delta variant or other new variants could also spook investors. Higher volatility is also expected as some valuations have become stretched, particularly in the US. Bond markets face headwinds as central banks plan to rein in bond buying programmes and raise expectations of moving to a policy of a gradual increase in interest rates.
German citizens go to the polls in September marking the end of Mrs Merkel’s fifteen years in power. Whilst the frontrunner, Mr Laschet represents steady continuity, the Green party is likely to present a challenge. Most importantly, looking ahead, Germany and the wider EU need to define their ongoing relationship with both Russia and China. Both these nations present political difficulties for Germany and the EU, but the Nord Stream 2 pipeline from Russia secures Germany’s energy needs and China is Germany’s largest export market.
Technology will Continue to Drive Growth
Once the economic bounce has run its course later this year, economic growth globally is likely to return to trend with a more pedestrian level of growth in 2022 and beyond. The transformation of every area of our lives by technology will continue, whether the drive for clean energy, protecting the climate, digital innovation or medical science; as such, companies delivering higher levels of growth will continue to command a premium, particularly when growth becomes more scarce as taxes begin to rise in 2023. Analysts are forecasting strong growth in earnings from technology companies over the next two years.
Balancing Coronavirus Control with Economic Impact
In the short-term, the main concern remains variants of coronavirus, the efficacy and the pace of the rollout of the global vaccination programmes, as well as the risk of further virus mutations, so the global economy can fully recover. There is also the ongoing balancing act of central banks and governments getting the timing right of reducing stimulus measures as growth returns. This is imperative so as to avoid stifling growth on the one hand, whilst avoid the global economy overheating on the other hand – maintaining the ‘Goldilocks’ scenario.
Looking further ahead, the prospect of higher taxes and high levels of debt are likely to impact future growth like a deadweight on the economy. But, the outlook for now remains positive as optimism about the recovery continues to dominate the agenda.
Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@SeabrookClark.co.uk
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