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16 Aug 2021
2021: A mid-year market review
Reflecting on market movements in the first half of this year and the forces behind them.
Having passed the halfway point of the year, we now have a good vantage point from which to look back on the first six months of 2021 from an investment perspective: the highs, the lows, and what these might mean for the future.
The markets started the year in much the same vein that they ended 2020, which has led to some stock markets, particularly in the US, reaching all-time highs. There have, however, been bumps in the road along the way, with two main factors influencing investor sentiment.
Covid-19 continues to impact the markets
Firstly, though we all look forward to the day when Covid-19 is relegated to the footnotes rather than the front page, for now, the pandemic remains a persistent concern. The recent spread of the Delta variant brought the return of volatility to the markets, bringing into question the strength of the post-lockdown economic recovery.
It remains our view that science will eventually suppress the virus, as vaccination rates continue to increase globally. Our approach remains to take advantage of short-term opportunities by tactically allocating clients’ assets towards the sectors that will likely continue to benefit from the reopening of our economies. At the same time, we recognise the fundamental long-term shifts in behaviour and lifestyle that have been brought about by the pandemic and continue to gain exposure to themes such as greater technological integration, healthcare advancement, and renewable energy, which will no doubt be more of a feature of our lives going forwards.
The outlook for inflation remains uncertain
The second major influence on markets over 2021 has been the outlook for inflation and the response of policymakers, particularly in relation to interest rates.
There remain opposing views on inflation. On the one hand, it is widely believed that the recent uptick is transitory, with the easing of short-term supply issues eventually bringing inflation back towards the 2% target. On the other hand, various factors bring this into question, most notably the costs of the transition to a more carbon-neutral economy, the establishment of shorter supply chains, higher dependency ratios (that is, fewer workers as a percentage of populations), and the continued intent of governments to increase spending to support their economies.
The reaction from central banks has been to hold a steady hand. Recent comments from the US Federal Reserve and the ECB were supportive of maintaining interest rates at their current levels for the foreseeable future.
Our assessment is that central banks will remain very wary about allowing rates to rise too much, if only because of the burden that higher interest payments would impose upon governments, households, and the corporate sector. However, it is something that we continue to monitor closely.
Growth in niche investment areas
During the first half of the year, we saw intermittent talk of a potential bubble in markets, which we feel has mostly been fuelled by some of the more speculative and niche areas of investing: cryptocurrencies, special purpose acquisition companies (SPACs), non-fungible tokens (NFTs) and “meme” stocks (such as GameStop).
We remain of the opinion that these do not currently represent a systemic risk to the financial system, neither do they have the characteristics required to form part of our clients’ investments portfolios.
Looking ahead to the rest of the year
While it’s important to look back on market movements with the benefit of hindsight, what is more important to investors anticipating what is yet to come.
In the short-term, sentiment is likely to remain fragile, however, with global economic forecasts for the year continuing to be strong, we remain confident in the economy recovering strongly over the medium to long term.