19 July 2021
By Mark van Moorsel, Co-Fund Manager WS Verbatim Portfolio 5 Income Fund
The trends markets experienced in Q1 have broadly continued in Q2. Vaccine rollouts still appear to be driving market growth, with outperformance occurring in those which have a greater degree of openness. As consumers in the USA, UK and Europe continue to spend on goods and services that were unavailable during lockdown, global supply chains are tightening and we are seeing marked increases in inflation. However, whilst rising inflation was detrimental to fixed income in the first part of the quarter, consistent messaging from central banks on the supportive nature of policy has led to a modest rally in fixed income. Equities markets continue to go from strength to strength with the exceptions being Japan and China. Increased government scrutiny in China has dampened investor sentiment whilst the ongoing restrictions in Japan have delayed the economic benefits of reopening.
Top 10 Themed Equities – 31.03.2021 to 30.06.2021
During the second quarter, investors were weighing the reopening of economies and successful vaccine rollouts against higher inflation and the potential for monetary tightening. Most central banks, however, indicated that monetary easing would remain in place for the time being, which, alongside improving macroeconomic data, allowed global equities to reach new heights. Bonds, on the other hand, have remained broadly range-bound after Q1’s dramatic sell-off.
Banks were the major winners in May with inflation data showing prices are rising across multiple segments of developed economies, fuelling expectations for rising interest rates. Banks stand to benefit the most from rate rises and as a result, Bank of Nova Scotia was a standout performer in the quarter. Financial derivatives provider, CME Group, also performed well thanks to higher volatility in government bond markets, underpinned by uncertainty over the timing of Fed tightening.
With new waves of government infrastructure spending, unseen since the 1970’s, continue to sweep Western economies it is unsurprising that Sequoia Economic Infrastructure was another top contributor for the quarter.
Credicorp was the fund’s worst performer over the quarter and as previously highlighted was sold from the fund. It was affected by increased political risk after Pedro Castillo received a far greater share of the vote than expected in recent elections. Despite legal wrangling over the result, Castillo claimed victory and looks set to secure the presidency –an outcome for Peruvian financial services which the market has interpreted poorly.
An improving infection outlook and mass vaccination rollouts mean that hopes of returning to normal are moving towards reality. But while this is undeniably positive news, the challenge of deploying the vaccine globally and for economies and societies to reopen fully, remains significant.
To revive economies, policy makers continue to draw on their playbook from the 2008 Financial Crisis but with greater urgency and scale. Central banks globally have shifted towards a more dovish monetary policy, potentially seeing lower rates for longer and a willingness to sustain higher inflation. Trillions in fiscal stimulus has also been pledged, targeting societal inequality with ‘levelling up’ policies, and industry stimulus such as Biden’s proposed infrastructure package and the UK’s ‘Green Budget’. Crucially, governments’ mentality towards debt has shifted, meaning we’re unlikely to see a return to the austerity that followed the 2008 crisis.
Over the long-term, we expect trends that the pandemic accelerated, such as e-commerce and working from home, are here to stay. Further opportunities will be driven by the shift to a more digital world, automation, climate change mitigation and adaptation, demographic trends and by shifts in consumption patterns in both the emerging and the developed markets.
Beyond the pandemic, there are other challenges we are monitoring closely. Rising inequality is our greatest worry and the consequences of the virus disproportionately affecting lower skilled, lower income populations. Global supply chains are also being tested, already fragile and now facing pressure from accelerating global demand, reshoring production and strategic supply nationalism.
Despite the challenges ahead, we remain positive on the prospects for a cyclical economic recovery in 2021 supported by international vaccination efforts. Ultimately, this combined with continued support from central banks should lead to an attractive environment for risk assets.
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