Poised for a rebound

We currently have an “overweight” position in equities. This is based on our view that recovery from the pandemic, along with continued support from authorities, should be supportive for stocks.

The prospect of a strong economic rebound has meant that it is the more cyclical areas of the market that performed best in the first quarter. This is in marked contrast to the trend of the last few years, when growth stocks – particularly those in technology – have led the markets.

We have benefited from the recent rally in more cyclical sectors, though we still have a bias towards growth in portfolios. This reflects our continued conviction in the longer-term structural themes that I have discussed before – such as technology, healthcare and global infrastructure. We believe they represent multi-year opportunities.

Opportunity in active management 

The recent change in market dynamics could well mean that there is more of an opportunity for “active” managers to shine in 2021. There continues to be a wide dispersion of valuations in equities, with sectors and regions performing very differently.

Global markets recover ... but follow distinct trajectories

Performance of major global equity markets since the start of 2020

^{Source: Cazenove Capital, Thomson Reuters}

We expect there to be further narrowing of the performance differential between those companies which were hurt by lockdowns and those which benefited. This should allow a wider range of active managers to perform well – in contrast to the past few years when outperformance has been limited to managers focused on growth opportunities.

Holding on to defensive ballast

There will be bumps along the road. Covid-19 remains a significant threat. Variants of the virus are a key risk and there could be renewed requirements for social distancing next winter. There are also risks arising from markets themselves. Falling bond prices, and rising yields, are a potential headwind for stock markets. Very elevated valuations in certain parts of the market could also be a trigger for volatility.

We therefore maintain the defensive ballast within portfolios through exposure to gold, government bonds and cash. While US bonds have been falling in recent months, the chart below shows they tend to perform well in times of more severe market stress. We have also increased diversification within our fixed income allocation through the addition of Chinese government bonds.  

Maintaining an allocation to defensive assets

Performance during equity market corrections

^{Source: Cazenove Capital, Bloomberg. Returns in GBP. Past performance is not a guide to future performance.}

A word on cryptocurrencies

The rise of Bitcoin has been a much discussed phenomenon this year. We are watching with interest, and believe the underlying technology could have valuable applications. However, we are not currently investing in the space for clients. The risk/return characteristics of Bitcoin remain too unstable. Bitcoin's potential as a currency also looks doubtful, given limitations on transaction speeds and the lack of regulatory support.