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27 Jul 2021

Stock markets rise as restrictions lift

Our latest investment update sees markets in rude health as vaccinations and consumer spending grow and economies open up.

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The stock market rise that began in 2020 as economies recovered from the pandemic continued in June despite inflation concerns and supply chain shortages.

As the post-pandemic recovery matures, we’re likely to see increased market volatility and more moderate economic growth. But we expect conditions to remain broadly supportive for investors into 2022.

Strong central bank and government support and successful vaccination programmes are chiefly to thank for the recovery so far. In the three months to the end of June, markets in the US, UK and across Europe showed the most momentum, while Japan and Asia struggled with rising Covid infections and slow vaccination progress.


 

POSITIVE PROJECTIONS FOR THE COMING MONTHs

Here’s just some of the evidence we’re seeing of sound economic growth:

  •  the OECD recently raised its estimate for global GDP growth in 2021 to 5.8%, up from 4.2% in December
  • it also said it expects the world economy to grow by 4.4% in 2022, up from 3.7% in December
  • the US and UK are expected to see record-breaking economic growth this year, according to the International Monetary Fund and Bank of England respectively

Sven Balzer, Head of Investment Strategy at Coutts, says: “So far 2021 has been a very good year for economies and markets in the US and Europe. The shift into a more mature phase of a post-recession recovery usually introduces some volatility, but the data still points to positive stock market performance into next year.”

Turning to any possible challenges, he added: “A lot of the good news is now in the price and discounted by investors. This increases the risks of setbacks if developments don’t match expectations. Risks include higher inflation surprises, changes in central bank policy and continued supply chain issues.”


STRONG MARKET PERFORMANCE SHOWS IN CLIENTS’ PORTFOLIOS AND FUNDS

The economic recovery means our clients’ balanced and growth portfolios have continued to deliver positive returns so far this year, outperforming their benchmarks. Our defensive mandates are flat across the year so far, with positive returns in the second quarter after a challenging start to 2021. 

The portfolio performance shown below is net, so has fees and charges deducted, while the benchmark performance is gross with no such deductions.
 

 

Cumulative returns calculated on sterling basis, including fees, charges and income to 30 June 2021. The data is based on composite performance, individual portfolio monthly returns are asset-weighted based on their respective asset values at the beginning of the month. Peer group returns provided by Asset Risk Consultants (ARC); end-June data represents ARC estimate. Benchmarks represent a static mix of equities and bonds in proportions relevant to each strategy. Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment. Sources: Coutts & Co, ARC. July 2021.

 

INFLATION: PRICES RISE BUT POSITIVITY REIGNS

US inflation shot up by 5% in the 12 months to May, its largest increase since August 2008, according to the US Bureau of Labor Statistics. And in the UK, the Office for National Statistics said inflation jumped in the same period to its highest level for almost two years, 2.1%.

Investors worry about rising inflation because it can lead to higher interest rates which make it more expensive for companies and consumers to borrow and spend.

But the US Federal Reserve (Fed) and Bank of England (BoE) put minds at rest by saying many of the price rises were most likely temporary, and maintaining supportive policies. Bond returns were positive in June as a result because markets moderated their future inflation expectations.

Sven notes, however, that the Fed has become “slightly more hawkish”.

“Its members raised the prospect of paring back their market-supporting measures and warned that inflation could become ‘higher and more persistent’ than expected,” he says. “The central bank now expects two rate hikes some time in 2023, up from no rate hikes just three months ago.

“The verdict on inflation is still out. Once unemployment has declined, some of the temporary inflation effects may stay higher for longer in 2022. But we don’t expect any sudden, imminent policy changes because authorities around the world would be reluctant to derail the economic recovery.”

 

“The data still points to positive stock market performance into next year.”

 

Sven Balzer, Head of Investment Strategy, Coutts

 

ONE HEALTHY SECTOR

Healthcare has been a solid performer for investors in June – a sign that we’re in a more mature stage of the economic recovery. The relevant companies tend to deliver decent returns as the economy moves from recovery to steady growth, partly because of their predictable earnings.

Positive long-term trends around an ageing population and increased spending also make the sector very attractive.

Our increased investment in healthcare in May reflects all these factors. We also liked the contrarian aspect of the investment as many investors concentrated on other sectors. This meant healthcare offered an attractive price having underperformed the S&P 500 over the previous year.

 

TWO MORE RESPONSIBLE INVESTING AWARDS

We won two more awards in June for our work putting sustainability front and centre of our investment process.

Described by the judges as “a comfortable winner”, we picked up Multi-Asset Manager of the Year and ESG Multi-Asset Fund of the Year (for the Coutts Multi-Asset Funds) at the Sustainable Investment Awards 2021, run by Environmental Finance.

Just the month before, we also won Best Wealth Manager, UK for ESG at the WealthBriefing European Awards 2021.

 

Find out more about responsible investing at Coutts

 


OUR VIEW OF THE WORLD

As we’re halfway through the year, we thought it a good time to share where we currently stand on key economies around the world, and our latest investment house view. If you’re a Coutts client and would like to discuss any of this in more detail, please contact your private banker.

  • All smiles for Uncle Sam – The US economy has been going from strength to strength, growing 6.4% in the first three months of the year compared to a year before, according to the US Department of Commerce. President Biden’s $1.2 trillion infrastructure bill agreed by the US Senate added more support on top of previous, large packages. We remain neutral on the US because much of the positivity is already priced-in to markets.
  • In the zone – Although the eurozone economy shrank slightly early in the year, leading economic indicators have reached multi-year highs in many regions, which points to a strong economic rebound. We increased our investment in European stocks in May as the vaccination program started to gather pace. The region should continue to benefit from the positive economic outlook and introduction of a long-awaited fiscal package.
  • Positivity in the UK – Stock markets in the UK have performed well most of the year so far. They benefitted from a speedy vaccination program and having lots of companies that do well when the economy expands, such as energy and mining firms. The BoE said it expects the economic recovery to happen faster than expected. Earlier this year, we increased our investment in UK stocks slightly after lowering our exposure to Chinese equities, where policymakers reduced fiscal stimulus and focused on controlling credit growth.
  • Emerging concerns – Market performance across emerging markets has been more subdued, with sluggish returns in June. This is mostly because of efforts by the Chinese authorities to cool down the economy and credit growth. A stronger dollar is also a challenge for these economies. We sold some of our holdings in emerging markets in March and May, using the money to buy European stocks. But we’re keeping a close eye on the region as long-term trends remain favourable for it.

 

OUR HOUSE VIEW

Economy

  • The reopening of western economies is becoming more visible – driven by the success of vaccine distribution – clearing the path for a significant recovery of the global economy in 2021. US economic growth in particular is set to be one of the best since World War 2.
  • While fiscal and monetary support and strong economic data remain important factors, other more traditional fundamentals will come into focus such as earnings and margin outlooks, or potential supply chain constraints.
  • Financial markets have priced-in much of the re-opening already, and are anticipating the next phase of the economic recovery when there will be less support from policymakers.


Equities

  • We have a preference for stocks over bonds. Given the economic impact of the vaccine roll-out and unprecedented monetary and fiscal support, we think the corporate profit outlook will continue to rise in 2021.
  • Over the longer term, we expect shares to outperform government bonds as the economic recovery remains supportive for risk assets.
  • Cyclical sectors such as energy and financials benefitted fully from the strong recovery and, going forward, we expect a more measured but ongoing upward path for them.


Bonds

  • Given unattractive valuations and the ongoing economic recovery, we are underweight government bonds.
  • With the reopening of economies becoming more visible, bond yields have risen, albeit from very low levels.
  • But government bonds continue to play an important role in providing ballast to portfolios.
  • We are broadly neutral on credit. With expensive valuations and rising bond yields, we are underweight investment grade, but selectively invest in sectors that still offer value.

 


long-term PERFORMANCE

 

Name

30 June 2016 to 30 June 2017

30 June 2017 to 30 June 2018

30 June 2018 to 30 June 2019

30 June 2019 to 30 June 2020

30 June 2020 to 30 June 2021

MSCI World (sterling, including income)

21.6%

9.3%

10.3%

5.9%

24.4%

Coutts Defensive Portfolio

7.7%

1.7%

3.1%

1.8%

3.4%

Peer group - ARC Cautious PCI

6.5%

1.4%

2.4%

1.7%

7.1%

Composite benchmark

5.4%

3.0%

6.5%

7.4%

2.6%

Coutts Balanced Portfolio

13.2%

4.2%

3.6%

0.7%

10.5%

Peer group - ARC Balanced Asset PCI

10.6%

3.0%

2.7%

0.5%

11.5%

Composite benchmark

9.8%

5.0%

6.6%

4.4%

8.9%

Coutts Growth Portfolio

18.3%

6.5%

3.9%

-1.1%

18.8%

Peer group - ARC Steady Growth PCI

14.4%

4.9%

3.5%

-0.5%

15.4%

Composite benchmark

14.6%

7.1%

6.7%

1.2%

15.4%

Return data for funds are calculated net of fees, in sterling and assumes reinvestment of dividends. Past performance should not be taken as a guide to future performance. Peer group returns provided by Asset Risk Consultants (ARC). Benchmarks represent a static mix of equities and bonds in proportions relevant to each strategy.  The value of investments, and the income you get from them, can go down as well as up, and you may not recover the amount of your original investment. Source: Coutts & Co., Asset Risk Consultants (ARC), Morningstar, Reuters/Eikon Datastream, July 2021. 

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