The first quarter of 2021 was dominated by the theme of rising bond yields and a related rally in equities with a ‘value’ or ‘cyclical’ style. The 10-year US Treasury yield has almost doubled in the first quarter (from c.0.8% to c.1.75%) and we believe a 2%+ yield is a realistic target for the second half of this year.
The speed of the repricing in bond yields has been a painful process for investors holding assets with ‘skinny’ yields and a long duration maturity profile, but ultimately is a very positive sign hinting that the global economy is starting to recover. The short-term outlook is likely to see economies operating at a level of growth that is likely to remove ‘slack’ from the economy in very short order once populations are vaccinated and current restrictions are removed (particularly in comparison to the very long and slow recovery post the Global-Financial-Crisis). In the short-term governments and central banks have created a liquidity bridge via a combination of super accommodative fiscal support and monetary policy to help support businesses and the labour force through on-going lockdowns and restrictions.
Reviewing investment markets more generally, global equities advanced and credit generally outperformed sovereign bonds, whilst pro cyclical commodities and energy also performed strongly.
In the US, equities gained following an early period of uncertainty resulting from some unusual trading activity. The recovery soon took hold following significant government stimulus. President Biden confirmed a fiscal stimulus package of $1.9 trillion with an additional promise of $2 trillion in infrastructure spending to follow. Financials, energy and industrials made strong gains, whilst technology and consumer staples lagged behind.
European equities advanced as hopes of a global economic recovery supported sectors that had suffered through 2020 notably energy and financials. Not surprisingly under-performers were in those defensive sectors that are less sensitive to the economic recovery or ‘growth’ stocks that are more sensitive to rising global bond yields.
It was a good quarter for UK equities; however, they remain discounted relative to other markets around the world. Again, energy and financials showed strong performance with the banks performing particularly well amid better-than-expected results and a sharp increase in bond yields as the global economic outlook gathered positive momentum.
Strong quarterly results coming out of Japan saw equities continue to rally along with the consistent weakness of the yen against the dollar. Inflation expectations and early indications of a change in global interest rates upwards saw lower quality value stocks lead the way.
Elsewhere in Asia (and within emerging market more generally), positive returns were recorded following investor optimism for a return to something approaching economic normality. This was tempered, however, towards the end of the quarter as the slower vaccination rollouts meant the reintroduction of lockdown restrictions in certain countries and a strengthening US dollar created a further headwind for some of the high growth emerging economies.
Despite the strengthening US dollar, commodities rallied strongly against an improving backdrop for global growth. Energy was amongst the top performers driven by strengthening oil prices on the back of an improved demand outlook and continued supply discipline. Within base metals, aluminium and copper took the lead posting strong gains. Declines, however, for the precious metals with sharp falls coming from both gold and silver – on reduced demand for ‘safe haven’ assets and rising real interest rates (increasing the implicit cost of holding Gold/Silver versus other forms of currency).