Global Market Insights: March 2021

March saw further gains in global stock markets as investors reacted positively to the surprisingly rapid rollout of Covid-19 vaccines in the US, UK, and elsewhere and the launch of substantial economic stimulus packages aimed at ensuring recovery. Global shares delivered an investment return of 4.7% to a sterling investor, the US leading the major markets with a return of 5.8%, Europe 4.7%, and the UK 4.2%. Oil and other commodities gave up ground while fixed interest ended broadly level. Gold, very much a beneficiary in times of crisis continued its drift lower, surrendering another 3.25%.

A year on from the height of the uncertainty created by the pandemic, the path to normality has not only been set, we are now a long way down it. In the short term, markets will react to the ebb and flow of current news, for example, new variants of the virus and speed of vaccination programs, but it is reasonable to expect that by this time next year normality will largely have been restored. Though in the future 'normality' will also include systems and controls aimed at preventing a repeat of the damage to western economies caused by any similar threat in the future.

That is not to say that it will be a return business as usual for financial markets or commerce. The pandemic has accelerated many trends that were already in place but also came at a time when many others appeared to be at an end.

One that looks certain to fall victim to the pandemic is ever-lower inflation. Many readers will recall the eighties' focus on controlling money supply growth in order to bring inflation under control. Today's economic recovery packages aim to do precisely the opposite - to ensure the economic recovery is strong and, if it falters, to provide yet more money. While a successful, growing economy is imperative for re-election, governments are also major borrowers so have a further incentive to see inflation above the 2% target - money borrowed today will be repaid decades later with money that is worth considerably less. The various economic recovery packages announced by the US, EU, and UK are all aimed at achieving these twin goals, with higher inflation preferable to a failed recovery.

Typically, inflation and government bond yields are not far apart, so in the medium term, we expect the benchmark UK 10 year government bond yield to rise above 2% from its current 0.91% and for fixed interest prices to fall further. The value of the bond and the interest paid will also be whittled away by inflation. This is not a friendly environment for fixed interest securities.

However, the majority of companies will benefit from modest inflation. Most will be able to pass on inflationary price rises to customers while others, for example, banks will be able to increase the interest charged on loans slightly faster than deposit rates to restore profitability to previous levels. Provided managements maintain tight control over costs the outlook for corporate profitability is very positive.

In the short term, there are always challenges and concerns. The trade spats under President Trump, clashes over human rights, the breach of the Hong Kong Treaty, and the targeting of individual and corporate critics are all reminders of the changing nature of a US-China relationship that had long underpinned global growth. And while we see over-valuation and signs of speculative behaviour in parts of the US stock market in particular, these tend to be areas where we tend to have relatively low exposure.

We remain positive on the outlook for equity and multi-asset portfolio returns this year.