Market update – May 2021
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.
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.
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