KEN BAKSH APRIL 2021 Market Report`
During the one-month period to 31st March, major equity markets, as measured by the aggregate FTSE All – World Index rose marginally against a background of generally more favourable COVID-19 vaccine news, “relative” political stability, and economic/corporate news releases much as expected. Asian and technology stocks however, bucked this bullish trend falling in absolute terms. European, including the UK, and American-excl tech equities led the advance. The VIX index fell to a level of 19.42, a fall of nearly 15% from the year end. Government Fixed Interest stocks, especially the US 10 year, however, still shared the headlines, with further price falls, the US 10 year for instance, closing the month at a yield of 1.72%, a yield not seen since January 2020, while the UK Government All Stocks Index fell was virtually unchanged on the month but down about 8% YTD.Currency moves featured a stronger dollar, largely on more favourable economic news and higher yields. The Chinese currency weakened a little against the Greenback and is now virtually unchanged over the three-month period. Commodity prices were generally weaker, partly the stronger dollar effect, with gold for instance off 5% and 11% over the month and quarter, respectively. Oil remains approximately 25% higher since 31/12/2020 with high March price volatility (OPEC,terrorist activity, Ever Given etc)
In terms of global economic data, there have again been marginal increases to 2021 aggregate forecasts, largely driven by USA and China. Provisional 2020 figures have been broadly as expected. In its January 2021 forecast the IMF predicted that by 2022 recoveries in US and China, while adopting differing COVID tactics, will leave their economies no more than 1.5% smaller than their pre-pandemic level, while Europe and emerging markets will take longer. The World Bank produced a January forecast of 4% 2021 world economic growth, followed by the OECD estimate of 5.6% 2021 growth, published mid-March. Following the passage of Biden’s stimulus bill US estimates have increased while it seems, however, highly likely that Europe and the UK will suffer a first quarter economic decline. COVID-19 developments during the month featured firstly more progress on the approval, roll out of the key vaccines, but also the emergence of more virulent strains, vaccine “politics” and selective lockdown renewals e.g France.
The fact that the global infection rate and number of deaths (2.8 million, March 26th) continue to grow, masks huge geographical differences, themselves tiggering differing virus containment tactics, Government support and Central Bank actions. At the time of writing a “third wave” of infections and deaths is affecting parts of Europe, India, and Latin America.
One sobering thought is that, at the time of writing, just under 6 vaccine doses per 100 people worldwide have been administered. The chances of reaching global herd immunity before late next year appear small and, of course, if the virus remains rife, the risk of dangerous variants emerging is high.
The recent US Federal reserve meeting reiterated the adoption of the new monetary policy strategy that will be more tolerant of temporary rises in inflation, cementing expectations that the US central bank will keep interest rates at ultra-low levels for an extended period, as well as maintaining bond purchases. The fact that the same meeting issued tentative growth forecasts of 6.3% economic growth re-ignited the overheating debate. Shorter term economic indicators include mixed trends within the labour market e.g February weak payrolls but some weather effects. Recently revised independent economic forecasts are now expecting over 6%-8% growth for 2021 with unemployment ticking down to around 4.5%. There are mixed views concerning the medium-term inflationary effect (currently 1.7%), and the course of the US 10-year yield, now at 1.72%. One measure of inflation expectations, the 10-year breakeven rate climbed to 2.36% last week, while the PCE index, the Fed’s preferred measure is expected to reach 2.2% by the end of the year. The economic debate is now shifting to Biden’s latest plan covering infrastructure, research and development, clean energy, and education ($2.25 trillion), as well as longer term tax raising measures (corporation tax, selective higher income tax etc).
At the ECB December meeting the emergency aid programme was increased, and the 1.8 Trillion Euro loan approved. More recent ECB meetings have seen interest rates maintained at -0.5% and a continuance of the pandemic bond buying programme. Very recent European sentiment surveys have pointed to a varying economic experience across the EU area. For example, German auto manufacturers are benefitting from strong Asian demand and the country has been registering strong manufacturing PMI’s (see chart), while, on the other hand, many Mediterranean tourist resorts remain closed. Some localized lockdown measures have recent been introduced in response to “third wave” Covid concerns. The EU commission currently expects 3.8% economic growth this year. February Eurozone inflation jumped to 1.3%, higher than expected (2.0% in Germany), and many companies are likely to pass more factory gate price increases to consumers as the year progresses.
Vaccination politics, Draghi’s initial policy initiatives, German CDU worries and Rutte’s re-election have dominated political news.
Asia excluding Japan, led by China (across all sectors and property), remains in better shape than other major regions (virus response, economic mix). Korea for example reported just a marginal GDP decline, while positive figures were reported for Vietnam and Taiwan (just reported +3.0% GDP growth for 2020, and a 49 % increase in export orders, first two months of 2021,yoy), the latter heavily dependent on the export of electrical components/devices.
China continues to report relatively strong economic data, showing 2020 full year economic growth of 2.3%, factory output far outstripping consumer spending. Forecasts of 5% to 7% are starting to emerge for 2021.The National People’s Congress, just ended, placed emphasis on green policies, urbanization, and scientific research, while uncharacteristically omitting reference to GDP growth projections.However,fallout from cooling US relations, domestic corporate “interference” and new sanctions (MSCI taking some stocks out of index) on top of last year’s gains may dampen equity enthusiasm going forward despite the relatively strong economic growth, and extra due diligence is warranted.
Within the UK, official GDP figures showed a 9.9% GDP decline in 2020, the worst performance in the G7, and largest UK fall for around 300 years. More recent indicators showed a not unexpected 2.9% decline in January GDP followed by a consumer uptick in February (ONS retail sales volume +2.1%) followed by a reasonably optimistic Gfk consumer sentiment reading for early March. The Services PMI for March outpaced the Manufacturing component for the first time since the start of the pandemic as orders flowed in before the easing of the lockdown. Unemployment remains around 5% but of course heavily distorted by the furlough scheme, recently extended, in stages, to end September. In addition to lockdown effects, certain economic sectors have suffered from shortage of components e.g cars, shipping container log jam (especially meat, fruit, and vegetables), bureaucratic delays, some EU labour issues (agricultural and NHS) and Irish trade disruption, largely Brexit related. On the latter issue European trade is considerably weaker, than comparable periods even after allowing for pandemic and stock building effects.
However, although the effect Covid-19 variants and the vaccine roll out may be moving targets, economic estimates and corporate confidence are starting to rise from late spring/summer 2021 onwards. Forward looking economic growth estimates cover a wide range, as the positive argument of relief/catch up spending, by an element of the population from records savings (16.1% estimated by ONS for Q4 2020) has to be balanced against rising bankruptcies, unemployment(5.1% latest unemployment rate), greater poverty, loan repayments and the spectre of higher taxes, and certain residual Brexit negatives (e.g. trade admin, tourist travel, financial services, EU defence, pharmaceutical co-operation, airline shareholder voting structure, Scottish/Irish future…)
Inflation, running at 0.7% in February is expected to drift higher in coming months, partly the basis effect, but also utility bills, council tax, fuel prices, while the 8.5% climb in January house prices, fuelled at least partly by the temporary stamp duty relief, is widely expected to moderate.
The Chancellor’s March budget centred on the “Jobs now, tax later” theme and received relatively small market and media reactions. Several muted tax adjustments which could have affected portfolio investment were omitted while the well flagged corporation tax increase from 19% to 25% only takes effect after April 2023.
The MPC recently agreed that no more stimulus was needed now, but further QE and/or negative interest rates are being actively debated and the March meeting re-emphasised that many options were still possible.
The Treasury’s average of forecasts suggests that the economy will grow by 4.4% this year and 5.7% in 2022
Although currently further from investor worries, growing concerns regarding global trade tensions (many), government debt (over 100% Debt/GDP), USA/China/Taiwan/Russia/Australia/Hong Kong, Middle East relations,Myanmar, BREXIT follow up and possible taper tantrums. It will be increasingly important to watch inflation trends, as any “shock” necessitating greater than forecast bond yields could have serious repercussions for many asset classes.
More intangible in nature, the pandemic also seems certain to amplify global inequalities (regional, medical, employment, poverty, demographic) which could manifest in growing social unrest.
Global Equities showed a mixed performance over March 2021, the FTSE ALL World Index registering a gain of 0.84%over the month (to 30th March) in local currency and 2.2% sterling adjusted. The UK, (both broad and narrow indices), Continental Europe,S&P excl tech outperformed, while Asia excl Japan, especially China, and the NASDAQ underperformed. The latter index las the averages year to date after being last year’s star performer as more focus has moved to value and cyclical names. The VIX index, ending the month at 19.42, a monthly fall of 26.72%.
FTSE100-5 Year Graph-Latest XXXXXX