In terms of global economic data, there have again been marginal increases to 2021 aggregate forecasts, largely driven by USA and China. 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. The IMF in its mid-April report predicts 6% global growth this year falling to 4.4% in 2022 but highlights the considerable regional variation. Following the passage of Biden’s stimulus bill US quarterly estimates have increased while it seems, however, highly likely that Europe and the UK will have suffered 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 rapid escalation of cases and deaths in India, parts of Europe and Latin America, emergence of more virulent strains, vaccine “politics†and selective lockdown renewals e.g France, Germany.
The fact that the global infection rate and number of deaths (3.2 million plus, April 28th) continue to grow, masks huge geographical differences, themselves tiggering differing virus containment tactics, Government support and Central Bank actions.Â
One sobering thought is that, at the time of writing, a small percentage of the world ‘population have received a vaccine of any sort. 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.Â
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. At the April meeting Biden highlighted the growth in the economy and gave more detail regarding flagging/enacting any tapering measures. Shorter term economic indicators include positive trends within the labour market e.g March payrolls, and strong recent ISM readings, although the inflation hawks also point to the recently announced 2.6% headline figure. GDP, just announced, grew at 6.4% on an annualised basis in the first three months of 2021. Recently revised independent economic forecasts are now expecting over 6%-8% GDP growth for full year 2021 with unemployment ticking down to around 4.5%. The economic debate is now shifting to Biden’s latest plans covering infrastructure, research and development, clean energy, education and social programmes, as well as longer term tax raising measures (corporation tax, capital gains tax, selective higher income tax etc). Analysts will be scrutinising near term Federal Reserve minutes especially in the areas of inflation and employment for signs that the tapering of bond purchases may be close.Â
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, a subject of much debate at the April meeting. Very recent European sentiment surveys have pointed to a varying but generally positive trends from April after the flash estimate of a 0.6% decline in GDP over the first quarter. The EU commission currently expects 3.8% economic growth this year. March Eurozone inflation remained at 1.3%. Surveys suggest that many companies are likely to pass more factory gate price increases to consumers as the year progresses.  Vaccination politics, Draghi’s initial policy initiatives (Italian recovery plan), German CDU worries/Green ascendancy and football (briefly) have dominated regional headlines.Â
Asia excluding Japan, led by China (across all sectors and
property), continues to remain 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.
All three of these equity indices have outperformed the global average so far
this year.
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China continues to report relatively strong economic data,
showing 2020 full year economic growth of 2.3%, factory output far outstripping
consumer spending and an 18.3% jump in first quarter 2021 output. Forecasts of 5%
to 7% are now the consensus for full year 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.
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While there have been no major changes in Japan’s economic
trajectory, Yoshihide Suga has suffered a setback in his first electoral test
as Japanese PM after opposition parties won a string of victories in
by-elections across the country, and the outlook for the coming Olympics is not
certain. At corporate level however, shareholder activism is rising and some of
the undoubted value in the market is being unlocked by private equity and other
transactions
 
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, and further improvement in April, especially over the second half of the month. Unemployment remains around 5% and hiring has picked up. However, business failures are increasing (Source: Begbies), the rent “holiday†is due to end, Brexit difficulties linger, many emergency loans are up for repayment, and the Furlough scheme wind-down may provide headwinds over coming months.
The Treasury’s average of forecasts suggests that the economy will grow by 4.4% this year and 5.7% in 2022.The average of leading independent economists now expect growth of 5.5% for 2021 (see graph), with some estimates as high as 7%. This would be the fastest rate of growth since 1989, and any expansion above 6.5% would be the strongest since the second world war.
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 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(5.0% 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, expected to be in the 1.5%-1.7% range for April may drift higher in coming months, partly the basis effect, but also utility bills, council tax, fuel prices, while the strong climb in 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.
Provisional government borrowing figures for the financial year 20/21 show a figure of approximately £330 billion, which while lower than some estimates, was still over14% of GDP, close to the percentage level reached at the end of the Second World War.
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.
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/Ukraine, 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.
Monthly Review of Markets
Equities
Global Equities showed a strong performance over April 2021, the FTSE ALL World Index registering a gain of 5.26%over the month (to 30th April) in local currency and 4.88% in sterling adjusted terms. The UK, (both broad and narrow indices), Continental Europe, Japan, and emerging markets underperformed, while the USA, especially NASDAQ beat the world average. . European indices and the S&P lead this year’s gains, in local currency while China, one of the 2020-star performers has shown barely any year-to-date movement. The VIX index, ended the month at 18.53, a monthly fall of 4.6% and is now about 19% lower than the year end level.
There were very mixed UK sector performances during April. Mining, oil and gas and life insurance (some ex-div adjustments) share prices fell while pharmaceuticals, property and retailers all rose by over 5%. Banks lead the year-to- date gains rising nearly 20% largely on a combination of yield curve moves, cost cutting, reserve releases and dividend resumptions in some cases. Tobacco shares are one of the weaker areas since end 2020, although hedge fund buying late in April brought some new buying interest. Since the beginning of the year, smaller company funds have outperformed equity “income†funds which have moved broadly in line with the average UK fund.â€. Mixed asset funds have shown growth of between 1% and 5%, depending on the equity weight, since the beginning of the year (Source Trustnet 30th April 2021).Â
Fixed Interest
Gilt prices rose slightly during the month, the UK 10-year yield for instance finishing the month at 0.84%. Other ten-year government bond prices also showed marginal gains with closing ten-year yields of 1.63%-0.2% and 0.09% in USA, Germany, and Japan respectively. All the followed core preference shares have significantly outperformed core government stocks in capital and income terms over the year to date and are still recommended if seeking fixed interest exposure with annual yields in the 5.3%-6% area or 10.3% for the more speculative idea.
The graph below illustrates a possible supply issue if tapering coincided with a diminution of overseas appetite for UK gilts and UK institutional preference for equities, infrastructure, propertyÂ
Check my recommendations in preference shares (note recent FCA/Aviva “apologyâ€), corporate bonds, floating rate bonds,zero-coupons, speculative high yield etc. A list of my top thirty income ideas from over 10 different asset classes is also available to subscribers.
Foreign Exchange
The US dollar weakened in April against all major currencies, the Federal Reserve’s dovish statements seemingly carrying more weight than the stronger economic growth statistics. The pound moved within a relatively tight monthly range, while maintaining year to date strength versus the US Dollar, Japanese Yen, and the Euro. Sterling adjusted equity indices show US and European shares considerably outperforming Japan over the four-month period, the latter index return suffering significantly from sterling’s 7.7% rise the Japanese Yen
Commodities
A generally positive month for commodities, with many double figure percentage price gains. Gold recovered a little after recent declines though still down 6.7% since the year-end while silver, platinum and palladium registered larger monthly gains with additional industrial demand. Oil steadied somewhat after recent OPEC, Suez Canal, and other geo-political developments, while copper climbed briefly to a new high, moving above$10000 for the first time in a decade. Iron ore benefitted from particularly strong Chinese demand. Amongst the “softs†wheat and corn rose 21.5% and 30.2% respectively, partially on supply issues. Over the year so far commodities have generally been strong with many gains over20%. Gold is the notable exception.
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Looking ForwardÂ
Notwithstanding the large human toll and uncertainly still posed by Covid-19 (lockdowns, geographical variations, vaccines) there is growing optimism regarding the course of the global economy.
Central banks continue to adopt an easy money policy, supplemented by other measures while Governments provide increasing short- and long-term fiscal support.
However, both supports will inevitably be questioned/reversed as and when the pandemic eases, and investors will have to assess the impact on various asset classes.Â
For equities, the two medium term key questions will be whether/if rising interest rates eventually cause equity derating/fund flow switches, government, corporate and household problems, and how the rate of corporate earnings growth develops after the initial snapback.
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Following the format of last month, I make the following observations.Â
Observations/Thoughts
• SECTORS-The dramatic change in equity confidence, from early November, largely because of the Biden election victory and vaccine announcements prompted large sector/style changes with new focus on value, cyclicals expected to benefit from sharper economic growth. This trend has continued with previously unloved sectors such as oil, banks, property, and selected retailers showing above average growth. At this time of writing, the first quarter results season is in full swing and of course forward-looking statements are becoming more important than historic results. The two trends I have noticed so far are firstly the significant out performance of actual earnings figures versus predicted, and secondly the rather luck lustre share price reactions of some of the more defensive/WFH names even when the figures surprised upwards eg Microsoft. On the other hand, banks, especially previously unloved European, including UK, names have tended to perform very positively, a theme also apparent with other cyclical “value†plays
• AS further statistical confirmation of the above, the divergence between my high and low risk COVID stock baskets remains high as more favourable vaccine news and economic upgrades (especially USA), have emerged. Since the 6th of November turning point, the weekend of the first significant vaccine announcement and the US election, the benchmark FTSE 100, S&P and NASDAQ have all risen approximately 18%.My “balanced†basket, broadly indicative of client portfolios managed has gained about 28%.Meanwhile,over the same period, many of the “higher risk†usual suspects, IAG, Carnival, EasyJet, Cineworld and Gym Group etc have risen on average by close to 70%,although still down on pre-pandemic 2019 high prices. Conversely the defensive basket is barely showing any growth at all (+5% on average), and many WFH stocks have actually declined in absolute terms e.g Netflix,Peleton,Regeneron etc
- The last months have shown the importance of maintaining a balanced portfolio. Many companies in the value/cyclical area seem likely to recover further, while great selectivity will be required chasing the Covid-19 risk stocks. Some of these names could recover quite strongly, in the longer term, but risks of bankruptcy, dilution, government interference/control should be considered. Conversely, previous†winners†must be assessed both on their relative valuation, as well as relative earnings growth in a post pandemic world. Higher bond yields will also have increasingly diverse effects on equity valuations and fund flows. On varying vaccine/lockdown developments it is possible to identify sub-trends e.g staycation versus airlines.
- Emerging Markets-Very difficult to adopt a “blanket†approach to the region with so many different COVID, commodity, debt, geo-political variables. Interestingly the rush into Emerging Market assets, both bonds and equities, at the start of 2021 has moderated as many dramas have unfolded e.g Turkey,India,Ukraine.Extra due diligence is required and remember to understand the currency as well as local market dynamics.
However, I continue to have a relatively favourable view on Asia, where relative COVID success, economic GROWTH! stable FX,inward investment and  export mix are supportive.Vietnam,South Korea and Taiwan are currently favoured. The active versus passive debate in 2021, will take extra significance where “China versus the rest†and appropriate tech weighting will be important considerations. More caution is required in many South American markets with poor COVID-19 situations, deteriorating fiscal balances and inefficient governments, many of which are up for change. Parts of Central Europe are currently showing some resilience, especially when linked to German exports, but the Covid-19 situation is currently worsening in some areas.Â
- Not on near term investor (or government!) worry lists but be aware of the huge government DEBT problem building (tax increases sooner or later). Latest figures show aggregate global debt in excess of GDP at the global level and the mantra of extremely low servicing costs, is just that !Sunak recently estimated that UK’s exposure to a rise of 1 percentage point across all interest rates was approximately an additional £25 billion in debt service costs . Apart from occasional bouts of term haven buying/liability matching, I expect conventional government FIXED INTEREST to continue to weaken in the medium term and would not be surprised to see the US 10 Year yield to trade towards 2.0% region sometime this year. During the month, Canada announced a gradual tapering to their bond purchase programme, and, at some stage, g US employment/inflation indicators could lead to a similar action in that country
-  However, other fixed interest options are available after, making appropriate allowance for risk, transparency, trading, liquidity etc. for clients seeking regular income.
COMMODITIES- Gold has been moving sideways/downwards since August 2020, and while longer term inflationary reasons and diversification benefits may apply, the prospects for more cyclical plays continue to look brighter. Copper, which has rallied significantly about since its Marc 2020 low, has benefitted from Chinese demand, “green†stimulus issues and some Covid-19 related supply issues and iron ore/coal are benefitting from a steel (especially in Asia) revival. Increased renewable initiatives, greater infrastructure spending as well as general growth, especially from Asia, are likely to keep selected commodities in demand and some analysts talk about another super-cycle! The Bloomberg Commodity Index has rebounded to levels not seen since 2015.This broadly based index gained 8% in April and is up 15% so far this year. There are still a few ways to play this theme, one of which currently trades at a discount to assets and offers an annual yield more than 4%, as well as standing at price around 35% lower than that achieved at the height of the last commodity boom.
Environment is expected to appear strongly on US (Biden plan), UK (November conference), and European political agendas over coming months. There are several infrastructure/renewable investment vehicles which currently appear attractive, in my view, combining well above average yields and low market correlation with low premium to asset value. Regarding the sector, be careful what you wish for, as covered in one of my previous articles. I would also exercise extreme caution in choice of benchmark, if used (see graph below). Inflows into self-proclaimed “sustainable†exchange traded funds overtook those into all other ETFs for the first time in Europe during the first quarter of this year with $25.8 billion taken in by funds according to Morningstar. The picture currently looks different in USA which has lagged Europe on the sustainable investment agenda. As a contrarian, there is an enormous opportunity for investors willing to lean against the ESG wave, a trend already apparent with many private equity deals, and hedge funds one of whom has been building stakes in tobacco companies.
·       Â
COMMERCIAL PROPERTY-The most recent
MSCI/IPD UK Property Index up to end of March 2021 showed a monthly total
return of 1.1% across all properties (14.1% annualised), and a year-to-date
return of 2.2% (0.8% income,1.4% capital growth). Â Growth in the value of industrial assets
continues to contrast with falls in office and retail. Within the retail sector,
shopping centre values continued to fall (-7.1% over three months) while warehouse
units were broadly unchanged. Similar trends were evident in rental growth
with, for instance a 7.2% gain in Industrial rents and a 5.0% fall in retail rents
(both annualised). Â Continued due
diligence is currently required in this sector both by asset type (direct
equity, investment trust, or unit trust,) property sub-sector, and geography.
Anecdotal evidence from the quoted property sector still shows great divergence
between say Segro, collecting some 98% of its rents, and numerous retail
developments, where survival in current form is sometimes in question. Pressure
is afoot to revise business rates, some still tied to 2015 capital values. Â Many large property funds have re-opened with
M&G Property fund set to open on 10th May. My current view is
that investors may wish to slowly move back to a more neutral situation for he
sector with my current preference for investment trusts rather than unit
trusts.Â
Good luck with performance!
Â
Ken Baksh Bsc,Fellow (UK Society of Investment
Professionals)
kenbaksh@btopenworld.com
3rd May 2021
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