Easter Market Commentary

A strong start to 2021

The global economy that enters April 2021 is one that is experiencing a rapid economic recovery from the pandemic which has gripped the world for the past year.

Despite daily headlines agonising over vaccine delays, the big picture is that major parts of the developed world, in particular the United States and the United Kingdom, are now well-advanced in their vaccination efforts. Those such as Europe which have lagged are beginning to make progress.

Our core view since November 2020 has been that these efforts will enable a relatively rapid return to normal life from the second half of 2021. Whilst those who were more optimistic than this will bemoan the slow response in the European Union, our investment view is predicated on this process playing out throughout this year – we always anticipated there would be some bumps along the way.

This anticipation of a rapid economic recovery is now clearly visible in the data. Forward-looking indicators of economic growth – such as the Purchasing Managers’ Index – point to solid expansion across the world. Likewise absolute measures of economic growth are being consistently revised up except in the most embattled European nations.

This has not been lost on the bond market which, in anticipation of rising inflation, has begun demanding higher returns to lend money for the long-term. For an investor this means the value of bonds is falling and losing them money.

This makes this a poor time to be invested in assets such as government bonds which have seen losses in the early part of 2021 that we believe are likely to continue throughout this year.

An investor can protect capital in this stage by holding on short-dated bonds. This is action we took in your portfolios before this change occurred.

This rise in the yield of bonds is both a powerful sign of economic expansion and an important indicator of the conditions for investing in shares.

During the early period of an economic recovery shares can be expected to rise sharply. We saw this in the second half of 2020.

This occurs as investors begin to anticipate the recovery. We call this period ‘multiple expansion’. This is because during this phase investors are willing to pay more for each pound of profit a company makes. Gains during this period are fast but unsustainable. This is what we saw at the end of 2020.

For equity markets to continue to make progress it quickly becomes necessary for company earnings to improve. We believe that such an earnings expansion is very likely to come through as the world moves out of lockdown.

However, it is also right to say that there are parts of the equity market which do look expensive at this time. In particular high-quality companies which investors flocked to during the pandemic are vulnerable to losses even if they post only slight disappointments in their earnings. Likewise, the US technology sector is by any standards highly priced.

However, whilst these expensive areas of the market grip the attention of the newspapers, they are very far from being representative of the wider market. We believe that relatively unloved areas such as the United Kingdom remain good value for investment and have increased our holdings here.

Indeed, we see this as a significant opportunity to profit from a normalisation of many areas of the market. We do this only cautiously, avoiding for example funds and companies exposed to areas like travel and tourism where the future is more uncertain.

Your portfolio adjusted at the end of 2020 to ready itself for the environment we have seen in the first quarter of 2021 and that has allowed your holdings to outperform.

Our view remains that this juncture is one in which there are good profits to be made from investing in shares. It is vital at this time to remain actively invested and avoid those expensive areas of the market most exposed to earnings disappointment.

Our investment process rotates through different market ‘factors’ according to the economic environment to position portfolios for times such as this. In practical terms this involves reducing our holdings in ‘growth’ and ‘quality’ shares at this time in favour of ‘value’ shares.

This requires the courage to invest not in the things that have risen the most in recent years, but rather in those things that look good value through the front window.

Be assured that at all times portfolios remain highly diversified across a wide range of factors, geographies and asset classes. Ultimately staying the course with robust diversification and an eye to the wider economic environment delivers for investors.