Over the second quarter, equity markets generally rose as vaccination campaigns accelerated in most developed economies, particularly in Europe which has made good progress in catching up with the UK and US. Emerging economies continue to lag on the vaccination front but cases remain very low in China and seem to have peaked in India after the surge in April/May when the new Delta variant emerged.
The success of the vaccine programme has enabled governments in most developed markets to further ease COVID related restrictions and higher levels of activity have been reflected in generally strong economic data, especially in the US which reached an annualised growth rate of 6.40% in the first quarter. In the eurozone the economy contracted by 0.60% in the first quarter but as rollout of the vaccine programme has improved, confidence has seen a boost with purchasing managers’ index (PMI) surveys pointing to a strong economic rebound having taken place in the second quarter. This backdrop suggests that global growth will remain strong in the second half of the year as remaining COVID-19 rules are eased, the UK for example intending to end all restrictions on 19 July.
The strength of economic recovery has fuelled some concerns over higher inflation and in the US the consumer price index increased by 5% year on year. Some underlying data suggests that there are temporary factors here such as the rise in used car prices and the base effect as prices are compared to the very low levels of 2020. The Federal Reserve continues to see the higher level of inflation as transitory but has become slightly less relaxed, indicating that the gradual withdrawal of the asset purchase programme is being considered and rate increases are generally expected by markets in 2023. Whether inflation proves to be a temporary measure or there is a sustained period of higher prices is one of the main challenges facing investors at present and this is reflected in the response to inflation related data.
The US was the strongest performing stock market in the second quarter (S&P 500 +8.5%) as stabilising bond yields helped to boost growth stocks. Strong first quarter earnings and the prospect of more fiscal stimulus from the US government, particularly towards infrastructure spending, provided support. European stocks followed closely (MSCI Europe ex-UK +7.1%) buoyed by the reopening of regional economies and strong global demand for manufactured goods. The UK market (FTSE All Share +5.6%) also saw further gains.
The spread of new variants of the virus, particularly from under-vaccinated developing countries, remains a concern if this results in slowing the full reopening of economies. An increasing number of cases related to the Delta variant has not so far led to significantly increased levels of hospitalisation however and this indicates that vaccines are effective in reducing the severity of symptoms. Japan has been the main exception among developed economies in lagging behind in its vaccination campaign and there has been stock market underperformance this year in comparison to global markets (TOPIX -0.3%). China which due to its relatively successful suppression of the virus is ahead in the economic cycle has seen markets negatively impacted by a tightening of monetary policy by the authorities and a regulatory clampdown on technology companies.
Within fixed income markets, investors continue to struggle to find attractive and reliable sources of income against a backdrop of low government bond yields and the possibility of higher inflation. This has seen increased interest in areas potentially offering higher returns such as high yield corporate bonds and inflation linked bonds.
The outlook for global growth seems likely to remain strong with pent up demand from consumers being replaced by government and business spending in the latter part of the year. The remainder of 2021 may see an increase in volatility for bond and equity markets with inflation concerns a potential source, diversification including alternative assets and strategies may be valuable in these circumstances but there should be the potential for equity markets to make further progress as the global economy expands.
|2021 Year to Date|
|FTSE World ex-UK (GBP)||+13.17%|
|FTSE Actuaries UK Conventional Gilt All Stocks||-5.60%|
|FTSE Actuaries UK Index-Linked All Stocks||-3.71%|
Performance to 06/07/2021
|Bank of England Base Rate||0.10%|
|Inflation (Retail Price Index)*||3.30%|
* May 2021