Markets Pause as Investors Reassess Expectations
Over the past year, following the initial sell off last March, we have observed a significant rally in markets, with a number of developed market indices now sitting near to or above pre-pandemic levels. After such a significant rally based on the expectation of an improvement in fundamentals as pandemic pressures ease, it was always expected that we would see a pause in the rally during the year, as investors reassess their expectations. This period of reflection has materialised in recent weeks, as investors weigh expectations for the pace of a recovery in activity and the implications of a strong recovery on fiscal and monetary policy over the years to come.
With strong progress being made in the rollout of vaccines across the globe, economists are increasingly forecasting that the bounce back will now be stronger than previously expected as economic activity returns. As a result, in recent weeks, we have seen bond yields start to adjust to the improving outlook and inflationary considerations. Although this movement has been quite swift, it is both normal and expected.
While risk assets reacted negatively to the rapid increase in government bond yields, the adjustment of bond yields to an improving outlook does not send a negative message to markets, and the outlook remains very positive moving forward. After falling to historically low levels last year, we expected government bond yields to reinflate to reflect a recovery in the outlook, and we expect yields to increase further over the year as a result. The rapid increase in yields and inflationary expectations caused investors to pause and adjust their expectations for a sooner than expected recovery, and specifically, adjust their expectations for monetary policy moving forward, however as fundamentals continue to improve and add further evidence of a recovery, it is our view that the rally will resume. Additionally, central banks and governments are expected to remain accommodative until well into next year at the earliest, with any spike in inflation resulting from the return in activity expected to be temporary rather than a more sustained rise which would require central banks to tighten earlier than expected.
Markets have been looking through near term volatility and towards the recovery since the initial Covid-19 selloff, however with fundamentals now starting to reflect an improvement in economic conditions, in the months ahead it will become increasingly important to focus again on the data. This will confirm the extent of the recovery and have arguably the largest impact on market movements and valuations moving forward. As such, while we are likely to see more short-term noise regarding inflation expectations and uncertainty over central bank policy, it is key to remember that the pause we are currently seeing is completely normal and does not change our outlook or expectations. Fundamentals are improving and the outlook over 2021 continues to brighten.
Key Events We Are Watching This Week:
- Friday: UK Manufacturing & GDP, US Consumer Confidence data
- Monday: China industrial production and retail sales data
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with significant Covid-19 infection rates, mixed economic data and political uncertainty. The portfolios declined over the week as investors paused to reassess expectations on the recovery. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather challenging market conditions.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 2018, China’s National People’s Congress approved the removal of term limits for a leader, allowing Xi Jinping presidency for life.
Have a great week,
Jason & Gina