Our latest investment commentary from Avellemy Chairman, Graham Bentley

Graham Bentley

April 2021 (covering March)

As the first quarter of 2021 concludes, I find myself composing this commentary on April Fool's Day and given the rather strange times we're learning to tolerate, I am struggling to determine facts from foolishness. 

While some wag on Twitter proffered a 'Teletubbies' crypto-currency named #Hugcoin, I am reminded that 'Dogecoin', a digital currency created 8 years ago as a joke, is up over 1,100% so far this year. Some innocents might be struggling to find, let alone pay for, Lipton's apparently upcoming 'self-jiggling' tea bags, but someone really did fork out $69 million dollars for a digital image. However, I did quickly dismiss the claim that Volkswagen is changing its name to Voltswagen, in a bid to underline its transition to electric vehicles. 

The remarkable performance of developed economies' stock markets is no spoof

Joking aside, the remarkable performance of developed economies' stock markets is no spoof, reflecting some positive reports on economic indicators and vaccine rollout. As a consequence, news continues to provide long-term investors with reasons to be cheerful. The month saw the value of company shares around the world accelerate, with the notable exception of Asia and Emerging Markets. 

While US shares broadly continued to advance, reaching yet another all-time high, there was some evidence that technology was running out of steam; the tech-heavy Nasdaq index rose a little in sterling terms, but this was due to currency movements. It fell back slightly over the quarter. Meanwhile the S&P index of the 500 largest companies rose by almost 6% over the month. In the UK the broad FTSE All Share index rose by almost 4%, driven to some extent by smaller companies - which are up 9% so far this year - and 'value' stocks, i.e. those company shares with otherwise depressed prices, but higher (and sustainable) dividend payments to shareholders.

A third wave of COVID cases is gathering momentum in Japan and Europe

Elsewhere, a third wave of COVID cases is gathering momentum in Japan and Europe, but while France, Spain Italy and Germany reintroduced more restrictive lockdown measures, their respective stock markets exhibited similarly positive rises to those in the UK and across the pond. In tandem, portfolios with rather more exposure to bonds than equities will have been held back by weak government bond returns during the month, continuing a trend running through the quarter.

Looking forward, in the US

Looking forward, President Biden's Federal spending plans are being likened to Roosevelt's policy response to the Great Depression - the 'New Deal' - but significantly more impactful. As well as a $1.9 trillion post COVID stimulus, another $2 trillion is being allocated to the 'American Jobs Plan'. While the US is the world's richest country, it ranks 13th in terms of the quality of its infrastructure. According to the White House fact sheet on the Plan, decades of disinvestment have led to "...roads, bridges and water systems crumbling...electric grid vulnerable to catastrophic outages. Too many lack access to affordable high-speed Internet and quality housing." If enacted, and in combination with deficit spending, excess savings and a 'post-COVID euphoria', the plan is likely to fuel accelerated economic growth and corresponding share price rises for the foreseeable future, but also potentially a rise in inflation and interest rates to counter any 'overheating'.

We've come a long way since the depths of despair 12 months ago, to sharing a narrative that warns of the US economy 'overheating', with an associated rise in inflation. As I've pointed out before in these commentaries, that expectation usually means bond yields rise to maintain the purchasing power of the income stream. Rising interest rates then ultimately strangle that economic growth, and recession results before the cycle starts again.

An almost perfect 'Goldilocks scenario' for equities

Remarkably, and despite the Jobs Plan announcements, this doesn't appear to be happening this time around. On the contrary, as the month closed it became clear that if anything inflation expectations have relaxed and yields have not risen any further than they already had in January and February - an almost perfect 'Goldilocks scenario' for equities. Further evidence for positive views on economic growth can be deduced from the Gold price. While the received wisdom is that gold is an inflation hedge, the price of the yellow metal is actually more correlated (negatively) with interest rates. When inflation threatens, interest rates generally rise to slow the rate at which money 'travels' through an economy, by dampening borrowing while encouraging saving. Gold looks pretty, but generates no income; consequently, it has less appeal versus the relative safety of cash. While we have endured the lowest interest rates in history, Gold struck an all-time high. Gold has fallen 20% from its August 2020 high when yields began to rise, reflecting the sense of foreboding regarding increasing interest rates. However, since the jobs plan was announced, the price has begun to rise again - another sign that fears of inflation are - for the time being at least - relegated to the background.

On facts and foolishness...

Finally on facts and foolishness, readers may have heard commentators increasingly berate the authorities regarding the efficacy of lockdowns, and their impact on our social and economic activity. Couldn't we have avoided the discomfort by following the much-lauded Swedish approach - protecting the most vulnerable but allowing so-called 'herd immunity' to take effect as life continued for most as normal? What appeared to be enlightened wisdom last year now looks rather more reckless. Norway and Denmark - countries who both adopted a total lockdown strategy - have a combined population greater than Sweden's, and a higher overall population density. Despite that relative 'transmission advantage', Sweden has recorded approaching 14,000 deaths, versus a little over 3,000 in Norway and Denmark combined. The negative impact on Sweden's GDP was greater than its Scandinavian neighbours. 

This data may not be decisive, but it does demonstrate that being different doesn't always mean being better.