Concerns about inflation becoming an issue for financial markets ameliorated somewhat during April although we would expect these concerns to reappear intermittently over the coming months. As the world emerges from Covid19, it is almost inevitable that we will see a one-off consumer boom as pent-up savings accumulated during lockdown are released. As we have previously said, however, this will be a relatively temporary phenomenon and is unlikely to create sustained upward pressure on prices.
Having said that, the expectation of an economic surge post covid is already becoming evident in markets as investors switch from high growth to more cyclical sectors which are expected to do better as the economy ramps up. Since the start of the year, the MSCI Growth Index, an index heavily influenced by the larger technology companies has risen by 7% since the start of the year while so called Value stocks are up by almost double that at 13%. In our view, this is a trend that has further to go and we may see Big Tech lagging further in the market over the coming months.
The Federal Reserve in the US was once again in the spotlight at the end of the month as the minutes of its most recent meeting were released. Once again, they restated their commitment to continued support of the bond markets despite the early signs of economic turnaround – QE will be around for a little while yet.
All leading equity markets recorded another positive month, although a relatively strong euro ensured that the increases in euro terms were more pedestrian. In China, exchange rate movements converted a positive local currency performance into a 2% fall in euro terms, the reverse of what occurred the previous month. As mentioned above, the emphasis in most markets was on stocks likely to do well on the back of opening economies. The favoured sectors included travel, energy and consumer stocks. Real estate stocks also did well as did commodity plays with the expectation that demand will turn up strongly over the remainder of the year.
|Market||Performance April 2021*||Performance 1 year*||YTD*|
Bond markets remain somewhat nervous around the prospect of rising inflation. In our view these fears are somewhat overdone although the absence of value in mainstream bond markets is beyond dispute and prices will more than likely drift downwards over the remainder of the year. As we have pointed out previously, there are niche pockets of the corporate bond market where there is still value to be had and where attractive yields can be achieved.
As negative interest rates are more widely applied and realisation dawns that they may not be a short-lived phenomenon for euro cash holders, many corporates and others are looking to alternative homes for their longer-term cash positions. Short duration corporate bonds and protected deposit structures offering small but positive rates of return are being increasingly sought out by such clients. Even higher yielding equities are seen as a valid alternative for at least a portion of these longer-term cash deposits.
The anticipated boom in construction activities of all kinds has already had an impact on the price of many commodities including copper, zinc, nickel, iron ore etc. We see this trend continuing as more regions return gradually to full economic activity. A further attraction of commodities of course is they have traditionally proven to be a good hedge against inflation for any investors concerned about rising prices. We are currently advising clients to hold a position in a broadly exposed commodities fund, either a passive ETF or an actively managed fund such as the one described in our Fund in Focus piece below.
We are anticipating a positive period for equities over the remainder of 2021, but we are advising investors to be selective in taking on exposure to equities in their portfolios. We are less enthusiastic about passively managed ETFs and prefer strong active managers, particularly those focused on quality and value rather than those focused on the high growth end of the spectrum. Funds seeking high quality exposures in the mid cap (medium sized companies) range are our preferred choice as we feel they will have an opportunity to outperform in the emerging environment.
Our Fund in Focus for May 2021 is the Blackrock World Mining Trust – Click here to see more details
As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email firstname.lastname@example.org.
This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and/or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: Past performance is not a reliable guide to future performance. Warning:
The return may increase or decrease as a result of currency fluctuations