Market update – June 2021

Stock and bond markets remain rangebound

The Indian variant of Covid-19 continues to spread and is now the dominant strain of the virus in the UK. While vaccines thankfully remain effective, the new strain could yet delay the end of social distancing restrictions, planned for this month. More encouragingly, vaccinations are being rolled out at a much faster pace in the eurozone after a slow start. Against this backdrop, markets have been relatively stable. Global equities remain close to recent highs, while government bond yields are slightly below recent peaks, despite continued inflation concerns. By contrast, there has been significant volatility in cryptocurrency (we have no exposure). This has not yet impacted other markets but it is a potential risk given growing institutional involvement in the asset class and high levels of retail  participation in the stock market. Many newer stock market investors have also invested in cryptocurrency.

Monetary policy shifts in focus

Investors have been reassured by central bankers’ assertions that high inflation readings are a temporary phenomenon and do not require a policy response. Even so, there are growing signs that officials are starting to worry about market exuberance. Chinese policymakers have warned of excessive speculation in commodity markets. And in its Financial Stability Review, the ECB cautioned that “some market segments continue to show signs of elevated valuations and may be at risk of a correction.” Communicating any shift in stance will be fraught, with one Federal Reserve member suggesting that the US central bank was “talking about talking about” scaling back its support measures. On balance, we think the Fed will at least slow its bond purchases later this year and start to raise interest rates next year. Irrespective of the exact timing, high debt levels mean that interest rates will probably have to rise slowly and remain relatively low.

Climate change moves further up investors’ agenda

The energy sector has enjoyed a rare moment of respite in 2021. However, there have been clear reminders that the sector will require radical change over the coming years, muddying its financial outlook. A Dutch court ordered Shell to accelerate its emissions reduction plans, while shareholders backed board changes at Exxon that may bring about similar changes. The moves underscore our belief that investors will increasingly start to “price in” climate change and other sustainability risks. We expect this will have a significant bearing on relative performance of companies, sectors and stock markets over the coming years.  

Portfolio positioning

We continue to expect that a robust economic recovery, and ongoing stimulus measures, will support equity markets. We have benefited from our increased exposure to more cyclical parts of the stock market, while retaining a slight bias towards higher growth sectors.  Where appropriate, we continue to maintain the defensive exposure within portfolios. While more defensive assets were under pressure earlier in the year, they appear to have stabilised for now, with gold recovering all of this year’s losses. We also recently introduced a new absolute return holding. These vehicles function as a source uncorrelated returns, while allowing us to take advantage of the continued dispersion in valuations across markets.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

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