GB-EN Intermediary

Looking beyond the market moves: focusing on the long term

Are we on the road to economic recovery?
June 2021
Paul Niven

Paul Niven

Managing Director, Portfolio Manager and Head of Portfolio Management, Multi Asset Solutions

Share

Share on facebook
Share on twitter
Share on linkedin
Share on email

Subscribe to our insights

Risk Disclaimer 

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

Past performance should not be seen as an indication of future performance.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The past 18 months have been a wild ride for investors, with global equities reaching all-time highs in early 2020 before sharp declines amidst some of the highest levels of volatility ever seen. Last year’s market moves in February and March briefly erased around one-third off the value of global equities, as investors factored in the extent of the damage being wreaked on the global economy through lockdown measures. Despite the scale of these downward moves, markets bounced back quickly and were predominantly back to pre-pandemic levels by the end of the third quarter last year, supported by the extraordinary fiscal and monetary response, notably in the US and UK.

More than a year on from the start of the pandemic, the economic recovery is now well and truly underway. Growth forecasts are strong and continue to be revised higher. Purchasing Managers’ Index (PMI) surveys, a gauge of economic activity, have registered strong gains in 2021 for the US, UK and Eurozone. In the UK, the Services PMI has enjoyed a notable boost in recent months as Covid-related restrictions were eased, and retail and hospitality venues reopened. Importantly, savings rates remain comparatively high in both the US and UK, suggesting significant levels of pent-up consumer demand. Reflecting the broad optimism on economic strength, forecasts for S&P earnings remain upbeat and earnings recovery is expected to continue into 2022, following significant positive earnings per share ‘beats’ in recent quarters.

Vaccines come to the rescue…for some

Clearly, the rapid development and rollout of Covid-19 vaccines has been critical to the economic recovery. Developed market countries are performing well, notably the US and UK, with the latter having fully vaccinated over 50% of its adult population. Previous vaccine rollout laggards Canada and the EU have stepped up their efforts and are gradually catching up; however, a lack of vaccine availability has meant that many emerging market countries are now far behind. Despite the progress made, new variants of the virus, which have the potential to reduce the efficacy or even evade vaccines, remain a threat to the relaxing of restrictions and the continuation of the economic recovery.

Easy financial conditions are here to stay…

The levels of government stimulus and the support from central banks in response to the pandemic remains unprecedented. For example, in the US, Covid-related relief and stimulus bills totalling at least $5 trillion have been signed into law. Not only have central banks cut rates to near zero levels, but they have also implemented vast asset purchase programmes in terms of both scale and breadth: the US Federal Reserve extended their asset purchase programme to include both high yield ETFs and so called ‘fallen angels’ (BB-rated corporate bonds) in mid-2020. The stimulus is likely to have long-lasting effects, and we expect that real yields will remain low – indeed negative – for some time to come. Despite the positive economic momentum that we have seen in recent months, central banks generally see rates on hold for several more years, suggesting easy financial conditions are here to stay for the foreseeable future.

…But inflation is a key concern

A short-term surge in US inflation indicators is leading to worries of longer-lasting pressures. Whilst financial conditions have been highly supportive, nominal bond yields have risen, primarily reflecting increases in breakeven inflation. The upcoming surge in demand brought on by a relaxation of restrictions and drawdown of significant consumer savings is leading to a stronger economic growth backdrop. This, coupled with base effects from the low readings of 2020, suggest that inflation worries look set to increase in the near term. In addition, commodity prices have also surged, with the key industrial metal, copper, reaching a new high in May 2021. While short-term bottlenecks in production are also currently playing a role, there is much debate among market participants over the nature of the higher inflation that we are currently seeing – in terms of whether it is transitory or more sustained. While we by no means expect a return to the level of inflation seen in the 1970s, a tilt to slightly higher inflation in the shorter term seems likely.

The outlook remains uncertain

With so many competing factors the outlook, as always, remains uncertain. Nonetheless, a brisk economic recovery along with supportive policy and low interest rates is positive for equity markets. Higher inflation is a risk for investors but, in our view, it is unlikely to materially undermine the attraction of equity markets. Stronger growth and a gentle uptick in inflation, combined with current valuations within equity markets, has led to a broadening in performance within equities, beyond the narrow set of disruptive leaders and ‘lockdown winners’.

Our approach

Our approach of diversifying the F&C Investment Trust portfolio across a range of geographies, sectors and investment styles, and accessing selective opportunities in private markets space has, over many decades, provided shareholders with consistent long-term returns. Whilst it is likely that markets will continue to face economic and Covid-related aftershocks in 2021, we remain focused on long-term opportunities across both listed and private equity markets for the benefit of our shareholders.

Risk Disclaimer 
The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.
Past performance should not be seen as an indication of future performance.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Subscribe to our insights

Related articles

Investment Trust
City panorama
7 min read
October 2021

Global Fashion Group – bringing the catwalks of Paris to Frankfurt

European Assets Trust Manager, Sam Cosh discusses Global Fashion Group, one of the companies in his portfolio.
Investment Trust
Digital data graph
5 min read
October 2021

Value stocks stage a return

It’s still early days, but it looks as if value stocks could be coming back into vogue again.
Investment Trust
Mother and son sitting on a table laughing
4 min read
September 2021

Behind the Supported Housing market

What is supported housing and how does it work?
Investment Trust
Large white warehouse
August 2021

Property in the pandemic and beyond – an accelerated shift to higher quality and ESG

How will the property sector look going forward?
Investment Trust
Digital charts on a monitor
August 2021

Volatility ahead, but also growth potential for the UK market

Stock markets have been on a wild ride in recent weeks
Investment Trust
A woman unpacking her purchases at home
5 min read
July 2021

HelloFresh – putting the convenience into cooking

Sam Cosh looks at a meal kit provider with all the right ingredients for success.