Quarterly Investment Newsletter: Summer 2021

Developed markets’ continued vaccine rollouts and a corresponding easing of lockdown measures buoyed equity markets during the second quarter despite already starting the period at elevated levels. Global stock markets rose by over +6% in Sterling terms and whilst the US was again the best performing region, European and UK stocks were not far behind. The outlier in developed markets was Japan whose vaccine programme lags well behind that of western markets, while emerging markets were also below average for similar reasons. Gold rallied strongly during the quarter before selling off to end up +2.4%, and Gilts posted a positive +1.2% return as yields remained stubbornly low as a consensus of any inflation being ‘transitory’ seems to have been reached (for now) in markets.

For some time now we have commented that markets were pricing in expectations of lockdown measures being eased, and some sort of return
to normality bringing about better fortunes for corporate earnings. We are now seeing that hypothesis play out in part as a very strong earnings
season went some of the way to justifying stock market valuations. That said, markets remain expensive by historical standards and will rely on the
continued reopening of economies being unaffected by unwelcome virus developments even with the now familiar backdrop of very accommodative monetary policy. Dispersion in fortunes between geographies and sectors remains a pronounced feature of equity markets, with the US remaining the most expensive market by virtue of its weighting to technology firms, and we expect active managers to be able to add value in this environment. By contrast to the US, the UK market continues to look markedly inexpensive as analysts’ expectations for better earnings in financials and industrials go unrewarded, and investors remaining seemingly undrawn to dividend paying stocks.

Lockdown measures in the largest economies are easing, workers are returning to jobs, and though in some areas the Delta variant is leading to an increase in Covid cases, vaccine rollouts mean that this wave of infections is proving less deadly. Vaccine supplies though remain a challenge for large parts of the world meaning that the now familiar economic problems will remain in those countries. While the situation is undoubtedly improving and swiftly so, we concur with the Bank of International Settlements’ view that we will see a “strong but uneven recovery”.

The possibility of higher levels of inflation, and how long these might persist, are the main questions vexing markets at present. For over a decade
extraordinarily accommodative monetary policy has kept financial assets high whilst not fuelling inflation in the real world. That economies have not fallen apart during the pandemic is due to quick governmental action, but at a heavy price in terms of fiscal deficits. The US at least looks likely to continue to spend beyond its income, and with the cost of borrowing presently so low others might be tempted to follow. Such fiscal expansion, cash saved by households during lockdowns, remaining pressures on supply chains, and the growing urgency to tackle climate change are all potential sources of inflation.

At our June meeting the Investment Committee voted to make no changes to our portfolios. We continue to feel that the bond market offers little value and thus maintain our overweight to equities and infrastructure assets. We continue to hold a balance between value and growth stocks, and favour the UK on a valuation basis.

I hope you find this newsletter interesting and relevant to you, and I would very much welcome any feedback you may have. Please do feel free to
get in touch with your thoughts either by phone on: 020 7063 4259, or by email on: david.baker@mazars.co.uk.

-David Baker, CIO