Stock Markets Firmly Looking Ahead

The aforementioned rise in bond yields was one of the most significant market moves of the last quarter. Despite central bankers keeping monetary policy easy and bond yields down, bond markets sold off (pushing up yields, the inverse of price) after positive economic data and significant fiscal stimulus came through. With the global economy reopening while monetary and fiscal policy remains loose, markets fear the economy might overheat and inflation could soon bubble over, forcing central banks to suddenly tighten.

Bond yield fears led to a blip for wider capital markets in the middle of quarter, with not only bond values but also equities falling back, as concerns arose that tighter financial conditions might spoil the extent of the recovery ‘party’. This was especially pronounced in emerging markets, where falls were compounded by returning political tensions between the US and China, and policy tightening from the People’s Bank of China. Investors had hoped President Biden would thaw relations with its largest trading partner after a tumultuous time under Donald Trump, but there has been no sign of cooling off, and the US has now signalled its attention to become less dependent in its supply chains from the region. Emerging market equities nevertheless posted a 1.3% gain over Q1.

Elsewhere, it is clear markets were eager to pounce on any early ‘vaccine dividend’, as those countries with higher vaccination rates fared much better than those with slow uptake. The FTSE 100’s 5% gain – compared to just 2.5% in Europe – had a lot to do with this, but Britain’s global large cap businesses have also benefitted greatly from the wider cyclical rotation, as UK equities have a distinct exposure to global growth. Investors are clearly most excited about the US, however, where a rapid vaccine rollout has been complemented by two of the most significant fiscal packages in recent times: A $1.9 trillion recovery act aimed at supporting citizens through the pandemic and a $2.25 trilion infrastructure plan that promises to boost US growth beyond it.

Things are much less positive in Europe, where the vaccination programme has famously stalled while virus cases are rising, and tighter restrictions are coming into force. The political finger- pointing does not offer much hope, but there are a few bright spots on the horizon, particularly that the vaccination campaign should now finally be gathering speed as large volumes of various vaccines are becoming available. The other one is that the Purchasing Managers’ Indices (PMIs) are showing an improvement in business sentiment on the continent, despite all the bad news. We fully expect the political drama to dissipate as we move through the year – if only as the rate of vaccinations picks up. We suspect this is the low point as far as market expectations for Europe are concerned, which makes the region’s low valuation levels attractive for investors.

On the whole, markets and the global economy have moved mostly in line with our expectations at the beginning of the year. The vaccine rollout is well underway in the UK and US, and this is clearly reflected in markets’ outlook for the rest of the year. Investors are particularly excited about the US, where a combination of monetary, fiscal and health policies have set the stage for a full- speed recovery. The Biden administration’s unparalleled swiftness and competence in executing its plans came as we had suggested it might, but nevertheless has created a tangible ‘get-up-and- go’ sentiment across US society that we have not seen since the 1980s era of Ronald Reagan. What’s more, growth is expected to ‘leak out’ of the world’s largest economy through increased demand. For the first time in years, the US looks set to be the motor of the world economy – to the delight of international investors.