The year so far in markets

The first quarter of 2021 was characterised by a sharp “rotation” within equity markets and a sell-off in global government bond markets.

More cyclical sectors of the stock market – such as energy and financials – rallied significantly, after performing very poorly last year. By contrast, higher-growth sectors, such as technology, have fared less well.

The rate of vaccine deployment is now having an impact on relative economic growth rates. The US and UK, which have been administering vaccines quickly, are enjoying a strong economic rebound. The slower roll-out in the Eurozone is delaying the recovery.

One factor which sets 2020 apart from previous recessions is the huge growth in bank deposits, in part a reflection of consumers building up savings during lockdown. This should provide fuel to the recovery this year and next.

Inflation is now a key risk

Headline inflation readings have risen due to increases in energy and food prices.

Central bankers suggest this is transitory: with unemployment still high, underlying inflation pressures should remain contained.

The current level of inflation is not problematic in itself. The worry is that rising inflation forces central banks to cut back on their support programmes sooner than expected. This would come as a big shock to both equity and bond markets.

Valuations far from cheap… but pockets of value remain

Equity markets around the world look expensive based on a range of commonly-used valuation measures.

Some parts of the market look relatively more attractive – including the UK and sectors such as financials and healthcare.

We see further potential for cyclicals to catch up as Covid-19 restrictions are lifted around the world.

Maintain exposure to defensive assets

Given continued risks relating to Covid-19, as well as emerging risks such as inflation, we are holding onto the more defensive assets within portfolios.

We have been increasing our exposure to “absolute return” funds. These funds invest in liquid markets and have a good track record of generating returns that are uncorrelated to stocks or bonds.

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