Financial markets post pandemic.

Thoughts from one of our Investment Managers Stephen Lovelock.

2021 has been labelled as the “year of the reopening”. Markets are now moving out of the pandemic period and entering an ‘in-between’ stage, where investors will have to be far more astute to discern which companies just rode a Covid wave and those that can capitalise long term. As talk of the end of the Covid-19 pandemic builds, concerns of inflation are on the agenda. Is the current talk and concerns about inflation just a flash in the pan as a result of the rapid recovery, after last year’s Coronavirus slump? The question on many investors’ minds, is if inflation is to continue, how high can it go and is it here to stay? There are some that say the US and UK are eager to run their economies “HoT”. If things slow down and inflation cools later this year, they may well pour more fuel on the fire. Inflation could become entrenched.

Inflation in the UK measured by the consumer prices index (CPI) rose to 2.1% in May from 1.5 per cent in April, exceeding market expectations and the Bank of England’s long-term target rate of 2%.

As we know inflation can eat away at investors’ returns, with cash, bonds and growth stocks on high valuations particularly susceptible. Investors may wish to think about diversifying away from the assets that have served them well over the past decade if the recent spike in inflation becomes a longer-term issue.

Investment trusts are good at protecting investors from moderate levels of inflation, as many trusts have revenue reserves and can support their dividends. However, because of widespread dividend cuts during the last year, some trusts reserves were diminished. Historically, trusts investing in property, infrastructure and commodities offer some protection from inflation. With shares in Real Estate Investment Trusts (REITS) also having a history of outpacing inflation.

There are other issues and concerns, which Covid-19 trends are here to stay, and which will soon be a distant memory. Will we return to offices? Will the high street survive? Will international travel bounce back?

Another factor to consider is despite progress in US-China relations, the Global economy is still under extreme stress and the path to a full recovery is unlikely to be smooth. We have yet to see the full impact of reopening the country but remain optimistic about the ability of vaccine delivery and the human adaption to normalise economic and social behaviours.