Markets rose across the board over the last quarter. Most markets had been trending up since the April 2020 lows, as COVID restrictions were reduced. New momentum was induced by the positive vaccine news. UK stocks advanced strongly. For much of the year UK stocks were the poor relation, particularly compared to some US Tech stocks. With the vaccine news and a Brexit trade agreement without tariffs UK stocks began to perform.
The pound rose to its highest for some time against the USD which will help with those hoped for summer 2021 holidays if the COVID situation allows.
Some areas of global stock markets have started to look expensive when viewed historically but it was the year of tech and the markets are reflecting the great changes taking place at pace.
Some other themes entered in the last quarter. With Biden winning the US elections, environmentally sensitive and companies considered socially responsible received a boost. Biden has promised to invest $2trillion into this sector both to push the environmental cause but also to rebuild. This looks to be a theme alongside tech that will have longevity and could also quicken and lead to disruption in many older industries and ways of doing business. I noted that at times during the lockdown, on occasion 59% of the UKs electricity came from renewable sources – mostly wind and solar. The UK is far ahead of its US cousin in this sector and if the US follows that is going to create some interesting investment opportunities.
Another area which has raised its head is the potential for inflation. In order to pay for the pandemic and schemes such as investing in the environment above, the US and many governments are printing more and more money. As a result, commodity prices have started to increase. My colleague Barrie Newton looks at this area in more depth and my colleague Steve gives his views on the economic impact of COVID-19.
The UK market has been held back from some years with the various uncertainties that have been around. Some of these key uncertainties are now behind us. It is quite likely that overseas investors and pension funds start to invest in the UK again, which could be very good for UK stocks. The UK stock market is much cheaper than many of its peers. Dividend yields still sit at around 4% and therefore still look very attractive against bank rates.
There are many World class engineering, software and pharmaceutical companies in the UK and listed on the UK stock market. At CFM we expect to see inflows of investment and bid approaches for many of these stocks.
Since the New Year, the US Federal reserve banks have begun to suggest they may raise rates quicker than expected. This has not yet been set in stone but may be a sign of things to come. This is set against a backdrop of massive borrowing for COVID and in the UK the money supply is growing at around 20% per annum. Such statistics have not been followed much for years but are now coming back to the fore. There has been a debate bubbling away for a while now with some suggesting inflation targeting, which is generally accepted as having been responsible for creating price stability for several years, with a new regime which targets real economic growth.
Naturally, there are pros and cons. What does this mean for your investments and mortgages? Interest rates have been falling for 30 years. We now see a situation of massive printing of money and potentially the policy framework changing to allow more inflation into the system. We may not immediately see high inflation in the statistics, but prices are likely to rise somewhat. Commodity prices are already rising sharply. Fixing a mortgage perhaps for longer than the 2 years we most do and choosing 5 or 10 might be worth considering.
For investments, bond prices have gone up and up for years. UK Stocks, the FTSE at least has not made much headway for 15 years. If there is inflation, companies that are able to increase their prices will see profits in nominal terms at least increase. Those stocks might outperform. High interest rates would hurt shares but if interest rates are held down and the companies’ underlying earnings increase, it will be good for shares and not good for bond investments. At CFM we will be holding more shares in balanced portfolio’s going forward. With government bonds paying out 1% and corporate bonds 2% against UK shares 4%, shares look better value and should offer some protection against inflation.
By Paul Coffin