A divergence of COVID progress
The UK moved to “Step 2” of its roadmap out of lockdown on 12th April. Beer shortages shortly followed, perhaps a clear measure of the UK population’s eagerness to get back to normal.
Sadly, the divergence in progress across nations was brought firmly into focus by the crisis in India. Daily records for cases and deaths continue to be broken, with India now accounting for 1 in every 4 COVID-19 deaths reported worldwide each day. Suddenly our own lockdown niggles feel much less pressing.
Long COVID in emerging markets?
The long term structural premise for emerging markets relies on the relative speed of their economic advancement compared to that of developed economies. The concern now is what lasting damage has this pandemic caused, and what’s the impact on that underlying premise?
This concern is reflected in the short term performance numbers, with developed market equities (except for Japan) continuing to outperform emerging markets this year. The sharing and distribution of vaccines will undoubtedly play a key role here. If the outcry around the ethics and greed embedded in the proposed (and now shelved) Super League is anything to go by, you’d hope the disparity in vaccination levels between high and low income countries will begin to be addressed too.
US markets reaching record highs
The US kicked off the month with job numbers that were ahead of expectations and finished with a reel of positive company earnings announcements. With the Federal Reserve keeping rates low and maintaining asset purchases of $120bn per month, it feels very much like business as usual for a while longer. The threat of a higher corporate tax rate from the Biden administration wasn’t enough to knock markets either, with the US returning nearly 5% for the month in Sterling terms, and the Dow Jones hitting a record high.
UK hitting significant recovery milestones
UK unemployment numbers came in a little below expectations at 4.9% vs 5.1%. However, with furloughed staff still in the dataset, these figures must be taken with a pinch of salt. Caveats aside and accompanied by a manufacturing Purchasing Managers Index (PMI) now reading above 60 (a PMI above 50 represents an expansion of market conditions), the FTSE 100 was propelled up to 7,000 this month. This is a significant milestone for the post pandemic market recovery, and a reminder that the market value of a company is very much based on future earnings and expectations, not the here and now.
Flexibility needed in the bond space
The sharp rise in government bond yields seen through February seems to have settled somewhat for the time being. Along with near term rates staying low, this has given yield curves a steeper and healthier look.
The flip side is that losses incurred by bond holders of late haven’t been recouped at all. Yes, there will be a steady stream of coupon payments, but it’ll take a while for that to offset the capital loss incurred by the upward yield pressure. All of this points towards maximising flexibility within the bond space; using strategic managers that can exploit numerous yield curves and move up and down the credit spectrum.
Property shows its worth
The steady returns of bricks and mortar property – marginally positive through April and YTD – feels like a helpful addition to a client’s portfolio in this environment too. With a degree of inflation protection to accompany the diversification, the liquidity trade off continues to be good one.
Value makes way for growth
The rally in value stocks paused for breath through April, with large cap growth stocks leading the way. The relative performance of the two investment styles correlates with the direction of yields. The slight fall in the US 10yr Treasury yield (1.74% to 1.62%) over the month fits with the short term reassertion of growth as the place to be.
Many value stocks fall into the cyclical category, so a sustained economic recovery ought to suit. Our view that some reasonable exposure to the investment style is warranted still stands. The same goes for mid and small caps – essentially, the parts of the market that should do better as the economy starts to recover.
Asset classes in numbers
| Name | 1m | 3m | YTD | 1yr | 3yr |
|---|---|---|---|---|---|
| FTSE Actuaries UK Conventional Gilts All Stocks TR in GB | 0.54 | -5.14 | -6.74 | -7.79 | 9.38 |
| ICE BofA Global Broad Market Hedge GBP TR in GB | 0.32 | -1.85 | -2.49 | -0.24 | 10.52 |
| IA UK Direct Property TR in GB | 0.37 | 0.80 | 0.68 | -0.94 | -0.90 |
| FTSE All Share TR in GB | 4.29 | 10.60 | 9.70 | 25.59 | 7.68 |
| FTSE USA TR in GB | 4.99 | 11.34 | 9.76 | 34.16 | 65.81 |
| FTSE World Europe ex UK GTR in GB | 4.50 | 9.42 | 7.04 | 34.70 | 27.85 |
| FTSE Japan TR in GB | -1.99 | 0.47 | -0.95 | 18.89 | 15.84 |
| FTSE Asia Pacific ex Japan TR in GB | 2.61 | 1.84 | 4.72 | 37.03 | 32.12 |
| FTSE Emerging TR in GB | 2.19 | 1.23 | 4.07 | 33.52 | 24.98 |
Source: FE Analytics, GBP total return (%) to last month end
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.