Investors can look back with some satisfaction on the first half of 2021, although the experience of making positive portfolio returns seems to be as unenjoyable as ever, with no end of siren voices calling time on the equity markets’ advances. The investment landscape remains dominated by a few key features: COVID; the nature, extent and durability of the post-COVID recovery; the outlook for inflation; the response of policymakers; and the desire of some investors to make a fast buck with little acknowledgement of the risks involved.
There are a number of subjects that we are happy not to be spending as much time writing about as we have in recent years, especially Brexit and the presidency of Donald Trump – even if the effects of Brexit will only completely reveal themselves in the fullness of time; and we cannot rule out the return of Trump to the White House in 2025. We can look forward to the day when COVID is relegated to the footnotes rather than being front-page material, but, being realistic, that is some time away.
Our underlying view since the vaccine trial data releases in November 2020 has been that science will eventually suppress the virus, but that progress will not be linear. We see no reason for a wholesale exit from many of the winners of the “stay at/work from home” trade. COVID acted as an accelerant to behavioural change with the adoption of a wide swathe of online services, and there is no going back to the status quo ante. As ever, a judicious balance between the “old” and the “new” is appropriate.
The subject of inflation remains a staple of commentaries, and while we continue to find no market consensus about its future path, we do believe that it will eventually settle at somewhat higher levels, on average, than pre-COVID (although not necessarily because of COVID). There are a number of reasons for this, including the costs of the transition to a more carbon-neutral economy, the establishment of shorter supply chains following recent disruption, higher dependency ratios (that is fewer workers as a percentage of populations), and the avowed intent of governments to spend more money, with post-financial crisis austerity now deemed to have been a mistake.
Finally, reflecting on some of the more speculative pockets of markets, we remain of the opinion that they are relatively small and do not represent a systemic risk to the financial system. Such areas might include cryptocurrencies, “meme” stocks (such as GameStop) and the activities of highly leveraged entities. They do certainly represent a willingness by some investors to take on high risks (and some of those investors might well not be aware of the risks they are taking) as well as an abundance of capital and liquidity.
As markets continue their ascent, it always feels tempting to lock in profits, but history shows that this tends to be a short-sighted approach in the absence of a compelling reason. Furthermore, jumping in and out of markets on a tactical basis needs two separate and equally difficult decisions to be made – when to leave, and when to return. It is one thing to reduce an overweight equity risk position back to neutral, but a much bigger statement to move underweight.
We must also remember that equity valuations are, to a meaningful extent, a function of the discount rate derived from the yields available on government bonds, corporate bonds and cash. These remain extremely low by historical standards, and although there is some upside risk, our assessment is that central banks will remain very wary about allowing rates to rise too much, if only because of the burden of higher interest payments that would impose upon governments, households and the corporate sector.
If you have any questions regarding this update or your own financial planning needs, please do not hesitate to get in touch on 0117 450 1300.