Weekly Market Update: Caveat Emptor
Mon 19 Apr 2021
UK equities reached the highest level in over a year as part of a broad-based rally in equities globally. Equity markets continue to benefit from increasing risk appetite as investors become increasingly bullish on a 2021 recovery. UK equities rose +1.6%, although it remains one of just a few regions not back to all time highs.US equities rose +0.7% in Sterling terms, the stronger growth moderated by Sterling rising +0.9% against the US Dollar. Globally the best performing sector was materials, whilst telecoms lagged other sectors. The US 10Y yield fell 7.9 bps to 1.6%. The UK 10Y yield was more or less unchanged, down just 1.0 bps to 0.8%. Gold rose +1.1% on the week, although it remains -7.6% so far this year. Oil rose +5.7% last week to $63.1 a barrel. Oil is up +28.5% this year. The jump in oil prices comes in spite of global coronavirus cases beginning to rise in many regions, with several European and Asian economies looking likely to increase the stringency of lockdowns.
The moment the calendar showed ‘1 April’, investors who have long seen it as a turning point in the fight against the pandemic acknowledged the moment as a green light to turn up their bullishness. There are certainly plenty of reasons to justify positivity, which can really be summed up in one: We have entered a period where fear credibly gives way to hope. The US is reaching the 40% vaccination milestone, while the Biden administration pledges to keep stimulating the economy at a nearly unprecedented pace, as long as it can get away with lower rates. The UK, another important G7 market, has vaccinated about half of its the population and is opening up for business. Europe is edging near the 20% level as well. The IMF projects that global output will grow by 6% this year. US corporates are expected to have the best quarter since 2018, with analysts forecasting a 24.5% rise in bottom line earnings. After spending Q1 consolidating previous levels, US equities are cruising near new record highs, nearly three times the previous cycle’s peak and more than six times the 2009 trough. Meanwhile, March’s bond jitters seem to have petered out, with the US 10-year Treasury bond back down near 1.5%, after peaking at only 1.7%.
Last year, when markets were dropping 35%, we advised clients to remain calm, fully expecting policy (fiscal and monetary) to step up. This time around, sentiment is inverted and thus caution is advised. For one, investment managers are too used to the Federal Reserve shaping reality via the real effect of cheap money and its psychological multiplier. This makes more sense when the event is endogenous to the financial ecosystem and psychology can turn things around. The argument is more precarious when the event, like the pandemic, is exogenous. Traders might be afraid to bet against the Fed but the virus has no such scruples.
Despite good news on vaccinations, there are plenty of variables that give cause for concern. Europe is still not out of the woods and the developing world hasn’t even started. ‘Double’ mutations are now appearing, some of which could become more resistant to vaccines. On the whole, only 7% of the world has been vaccinated. While the developed world is squabbling over and using up a limited supply of vaccines, developing countries left behind are acting as Covid-19 ‘factories’. Add Pfizer’s comments that a third shot might be needed after a 6-month period, and one understands that vaccine doses currently available are still very few.
At the same time, and despite the change of direction by the White House, vastly different responses on the pandemic are exacerbating strains on global multilateralism. Nowhere is this more obvious than Europe, which is also preparing for a change in German leadership by September. Additionally, investors have to contend with expensive equity and bond valuations and low cash levels and thus firepower from fund managers.
Current exuberance is not irrational, especially after a dreadful year. But needs to be in good measure and fully cognisant of the risks ahead.
David Baker, CIO