Investment Management Update | Key Themes Throughout February
The global economy continues on its path to recovery with the increasing pace of vaccination distribution bringing us ever closer to some semblance of normality.
Investors have taken comfort in faster-than-expected vaccine rollouts in the UK and US with both regions now guiding that all adults who want the vaccine will be vaccinated by the end of July.
Monetary policy remains supportive with the Federal Reserve, the US central bank, guiding that interest rates and asset purchases won’t be lifted until “substantial further progress” is made towards its dual targets of employment and inflation. Fiscal support remains with the US House of Representatives voting a further round of stimulus, currently tabled at $1.9 trillion.
In light of the above, we retain our belief in a cyclical recovery. This is a medium to long term view and we understand there could be some near-term challenges to this thesis. This is why we retain a mixture of styles within the True Potential Portfolio proposition offering a diversified approach to help navigate through differing market conditions.
Over the month, much of our discussion focussed on the interplay between inflation and economic growth and the short and medium term outlook for both. We believe economic growth for 2021 will be strong, as individuals and businesses continue their journey of recovery. We know inflation will rise this year due to the fall in prices overall last year. We see this as a base effect and believe that central banks will be extremely careful around messaging to ensure investors understand this.
Arguably the key question for investors, is with large stimulus, high savings rates, rising input costs and pent-up demand, could this be inflationary over the longer term? Factors present both pre- and post-pandemic such as the continuing role of technology, an ageing population, and de-unionisation all push down on inflation. Currently, there are 10m people still unemployed in the US although unemployment has recently fallen from 6.7% to 6.3%, with a mixture of individuals leaving the labour force and being re-employed. We know inflation will rise but we do not see becoming out of control.
From an individual asset class perspective, discussion focussed on the following areas: –
- The inflation effect for this year could offer some near-term opportunity to invest in bond markets, should inflation cool later in the year. Also, with yields now at higher levels within sovereign bonds, this is a way to access yields above cash.
- The recent earnings season has proven the durability of many of the US large technology companies. Over the near term, share prices may be supported if these companies continue to deliver superior earnings growth. Although, the large valuation gap between equity market styles of growth and value relative to history could lead to value outperforming.
- US smaller companies have provided strong returns over the past few months, driven by their inherent cyclical nature during the economic recovery and vaccine rollout. This holding has been trimmed due to the significant strength seen, although over the longer term this area still looks promising.
- Asia has weathered the pandemic better than other regions with GDP in China growing in 2020. The People’s Bank of China (PBOC) are focussing on financial stability and are starting to tighten policy. This is a long term positive but important to monitor. China is clearly on a path to normalisation and the PBOC realise that to tighten too much or too quickly could have unintended consequences.
- The gold price has been challenged during February, the US Dollar stabilised and sovereign bond yields increased. Overall, gold is still seen as having a place within Portfolios, offering further diversification.
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