Global Markets to 9 April 2021
- Rising bond yields and a rotation into the more cyclical end of the stock market
- The pandemic has increased the pace of change
- A fifth industrial revolution?
- End-of-lockdown euphoria
- Government bond markets are nervous
- Sit tight; do nothing
Rising bond yields
… and a rotation into the more cyclical end of the stock market as the first quarter ends
The first quarter of the year was dominated by rising bond yields and a rotation out of equity growth stocks into value. Global central banks are expected to remain highly accommodative and the pace of the global vaccine rollout is set to increase, two factors likely to fuel the financial markets.
On a macro level, global economies should start to reopen and recover from the devastation of the pandemic. Many of the sectors that have suffered the most should be reinvigorated as they start being able to meet pent-up demand and a strong period of consumer spending gets under way.
Although it is difficult to predict the fundamental backdrop for the market until the pandemic has been completely brought under control, we believe that it is improving: evidence would suggest that the business insolvency rate has peaked and will start to decline throughout the rest of this year and into 2022.
It has now been over a year since the global equity markets collapsed before rallying back, recording their shortest bear market in history. And recent predictions regarding the reopening of the global economy have meant further advancements for risk assets.
The pandemic has increased the pace of change
… although disruptive technologies emerged long before Covid
The last twelve months have seen a significant increase in the pace at which global consumers are starting to shop online. The positive experiences that they have enjoyed have all contributed to increased investment in other related business sectors – such as logistics, online payment facilities and web and app services.
Needless to say, these disruptive technologies started to emerge long before Covid. But global lockdowns and economic devastation have catalysed their adoption in all areas of people’s lives.
While these are undoubtedly exciting times for companies driven by innovation, it could well be the end of the road for many others that have found themselves unable to embrace change. Automation, artificial intelligence, digitalisation, innovative platform business models and a plethora of other scientific breakthroughs are creating outright winners in the marketplace. But every drive to modernise results in casualties. According to McKinsey Global Insight, by 2030 between 75 million and 375 million people worldwide may need to find other jobs, refine their skills or gain new ones altogether as mass automation sweeps across most global industries. But the benefits will include higher productivity levels, growth in GDP and improvements in corporate performance.
Are we about to experience a fifth industrial revolution?
Every technological revolution brings with it changes to peoples lives, as well as changes in how they do business and spend their leisure time. Flexible working hours, variable levels of employment and possibilities for people to freelance in industries about which they feel passionate are all likely to create new entrepreneurs and jobs, while continuing to drive innovation.
History has recorded four industrial revolutions. The dawn of steam power was the first, followed by the age of science in mass production, and then the digital revolution. And now, we are just embarking on the next phase of a Covid-accelerated technological and social revolution.
Commentators are already evoking a fifth industrial revolution as human beings start interfacing with machines in the workplace. This is likely to further reshape the world over the next few decades.
For now, however, the imminent end of the lockdown has already had a remarkable effect on the financial markets. Indeed, analysts are predicting that we are about to experience the strongest global economic recovery in a generation – a prediction that is propelling stock markets.
Although so-called value stocks have recently outperformed growth stocks because many of these businesses are classified as cyclical and are major beneficiaries of a strong economic recovery, global investors should have exposure to both growth and value in a well-balanced portfolio. Indeed, there is now a third classification: disruptive stocks.
Nonetheless, the year has begun well for global equity markets. In the US and UK in particular, small caps that are very sensitive to positive noises about the strong impending global economic recovery have fared positively. It may well be that global investors’ euphoria and their dynamism have pushed share prices too far and too quickly. But with the expectations of a solid Q1 corporate earnings season (that begins this coming week), the strength of the markets is quite understandable.
Government bond markets react nervously…
… as the likelihood of higher inflation and interest rate hikes increases
Also understandable is the recent sell-off in government bonds: the threat of higher inflation and a possible central bank policy error have had the bond vigilantes puzzled over the eventual outcome. Although the threat of higher inflation (recently evoked by both Fed chair Jerome Powell and US State Secretary Janet Yellen) is less of a risk in the short term, letting the US economy run hot for a while could create difficulties further down the road.
Much has changed over the past twelve months, and it now looks as though monetary and fiscal policies will need to normalise as the global economic recovery gets under way. This will affect the day-to-day trading of financial assets.
Sit tight, do nothing
However, investors would be best advised to continue to compound their wealth over the longer term – the dangers of short-term noise can easily knock you off course. The best thing to do in times of market stress is be patient and do nothing… other than continuing to identify great innovative businesses with strong balance sheets, healthy cash flow and long-term earnings potential. This is our time-honoured strategy – a strategy that will enable us to create and sculpt new and exciting investment opportunities for our clients.
By way of a conclusion, the directors and staff of Investment Quorum would like to send their heartfelt condolences to Her Majesty the Queen and other members of the royal family on the loss of HRH Prince Phillip, Duke of Edinburgh. He was truly a man of boundless attributes and will be greatly missed by those closest to him, the people of Great Britain and indeed the world.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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