Market update – March 2021

End of lockdown in sight 

The UK is starting the process of emerging from lockdown, with schools set to reopen early this month. There are now clear signs that vaccinations are reducing hospitalisation. Early data from Israel, which has now administered at least one dose of vaccine to most of its population, also suggests that vaccination is cutting transmission. Global equities remain close to recent highs with “reflation” themes – more cyclical areas of the market that depend on stronger economic growth – enjoying strong performance. However, volatility has been picking up slightly. This was first evident in a small number of individual stocks. It is now government bond markets that are attracting attention. If sustained, this could unsettle equity markets.

Renewed fears of a taper tantrum

While government bond yields remain low by historical standards, they have risen significantly from their lows of the last year. In the US, the benchmark 10-year Treasury now yields 1.45%, compared to a low point close to 0.5% last summer. The move reflects increased optimism about economic recovery and the prospect of higher inflation. There is a risk that higher interest rates could upset today’s market equilibrium. Both government and corporate debt levels are high and interest rate rises can increase financing costs considerably. Additionally, today’s relatively high equity market valuations – especially of growth sectors – depend on low-interest rates. However, our base case remains that core inflation is likely to remain contained and that central banks have the tools they need to keep yields from rising to uncomfortable levels.

US fiscal stimulus makes progress

Joe Biden has secured approval for a near $2 trillion stimulus package from the House of Representatives. Getting it through the Senate, where the Democrats have a very slim majority, will be more problematic. Disagreement is now focused on the $15 minimum wage. In the UK, the 2021 Budget will be published as public debt reaches 100% of GDP for the first time in 60 years. While the Budget is now widely expected to include a slight increase in corporate taxes, other mooted tax rises are likely to be put on hold until the recovery from the pandemic is more secure.

Portfolio positioning

We expect that a robust economic recovery, supported by government stimulus measures, will continue to act as a tailwind for global equity markets. In recent months, we slightly increased our exposure to more cyclical areas of the market to take advantage of the continued performance gap between industries most affected by lockdowns and those which benefited. However, there may be bumps on the road to recovery and we maintain our holdings in more defensive assets – such as gold, government bonds and cash. We also maintain our conviction in long-term structural themes such as technology, healthcare and global infrastructure.

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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