Market update – May 2021

Markets tread water

Economic data continues to point to a strong recovery, with US output estimated to have increased at an annualised rate of 6.4% in the first quarter. Equity and bond markets have generally shrugged off the latest figures, suggesting that a substantial recovery has already been priced in. The US and UK, which have fully vaccinated 38% and 25% of their adult populations respectively, are enjoying the fastest growth. However, the pace of recovery from the pandemic remains very uneven. India, in particular, is struggling with a devastating resurgence in cases. This could yet have global implications: the continued spread of the virus increases the risk of vaccine-resistant variants and makes it harder to open international borders.

Fiscal and monetary policy continue to support US growth outlook

President Joe Biden ended his first 100 days in office with a speech to both houses of Congress. He appealed for support for $4 trillion of spending on infrastructure and welfare, to be funded with tax increases for higher earners and companies. The muted reaction in markets indicates there is significant doubt that the plans will win approval in their current form. Meanwhile, investors have been reassured by continuity in the monetary policy outlook. Following its April meeting, the Federal Reserve suggested that higher inflation is due to “transitory factors” and that tapering of the Fed’s bond purchases is still “some time” away.

We see higher inflation in short-term

Commodity prices have been rising, with industrial metals and agricultural products seeing particularly sharp increases. In many cases, these moves reflect the combination of surging demand as lockdowns come to an end and restricted supply. This will undoubtedly feed through into higher headline inflation readings over the coming months. However, we share the Fed’s view that this will prove to be a transitory spike, much like we saw a decade ago. Back in 2011, higher oil and food prices pushed the US Consumer Price Index to around 4%, but core measures of inflation remained contained. We expect this pattern will be repeated in 2021, with headline inflation falling later in the year.

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 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. We have also increased our allocation to absolute return funds, which can offer uncorrelated returns while taking advantage of the significant dispersion in valuations.

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

James Brennan

Portfolio Director