Market update – April 2021

Latest data suggest economic rebound underway

The recovery from the pandemic continues, at least in the UK and the US. Recent economic data, including better-than-expected US manufacturing and consumer confidence surveys, all suggest ongoing improvement. Europe remains the laggard, as the vaccine roll-out continues to be delayed by shortages and scepticism. Germany and other eurozone countries have extended or returned to lockdowns, further delaying the recovery. However, in response to the brighter global outlook, government bond markets remain under pressure and equity markets are close to their highs. We have seen continued rotation into more economically sensitive parts of the market, with many formerly high-flying tech stocks falling out of favour.

Some signs of market fragility

The weakness in some technology shares was exacerbated by the collapse of Asian family office Archegos, inflicting losses of as much as $10 billion on investment banks. The episode is a reminder that leveraged strategies can quickly run into difficulties, especially against the backdrop of significant shifts in the macroeconomic environment. While the trigger was very different, the collapse of specialist lender Greensill Capital earlier in March may be another sign that there is too much complacency in some parts of the equity and credit markets. These specific events may have no further repercussions. However, they do suggest that after a period of very strong returns, a degree of caution is warranted and that we could be returning to a period of higher volatility.

Biden signals further US fiscal spending

Following the passage of a near-$2 trillion coronavirus relief bill, Joe Biden has set out plans for a similarly-sized infrastructure programme, focused on fixing roads and bridges and expanding broadband access. As indicated during last year’s election campaign, the White House plans to pay for the additional spending by increasing the corporate tax rate and the taxation of foreign earnings. The package is likely to face considerable opposition in Congress. Assuming some of it is passed, it should support recent market trends; rising interest rates and further rotation into more cyclical sectors at the expense of higher-growth sectors. One consequence of this rotation is that the “duration” of equity markets – their sensitivity to future interest rate moves – should decline.

Portfolio positioning

We continue to expect that a robust economic recovery, and ongoing stimulus measures, will support equity markets. In recent months, we have benefited from an increased exposure to parts of the market that benefit from stronger growth. Performance has also been helped by our modest underweight in fixed income. However, while bonds and gold have been under pressure in recent months, we continue to believe they offer valuable diversification characteristics in periods of more severe market stress and we retain a meaningful exposure. We also maintain our conviction in long-term structural themes such as technology, healthcare and global infrastructure, with the latter in particular set to benefit from Biden’s latest spending plans.