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A year has now passed since the spread of Covid-19 became headline news and countries around the world started entering lockdowns.  Few would have predicted the strength of the stock market rebound following the March 2020 crash.  During the reporting period, some sectors of the equity markets continued to test record highs, although others remained depressed, clouded by the uncertainty of what the recovery from the pandemic will look like.  On the whole though this was a positive period for investors, despite some heightened volatility mid-way through the period. 

Equities had another good period, albeit the returns were somewhat more lacklustre than the previous period, outperforming credit with yields rising from record lows.  Corporate credit continued to outperform sovereign debt with the FTSE All Gilts Index losing -7.2% and the iBoxx Sterling Corporates Index -4.4%.  Index Linked Gilts had a tough period despite investor fears over inflation in the short term, with the FTSE Index Linked Gilt index losing -6.4%.   

Within equity markets, the rotation in favour of value and small-caps continued as a result of the expected post-pandemic normalisation and rising bond yields.  UK equity markets, with their more value bias, had another good period relative to other developed markets.  The FTSE All-Share Index gained +5.2%, with mid-capitalised companies marginally outperforming their more blue chip counterparts, benefitting from their higher domestic exposure.  Furthermore, sterling strength, up against the US dollar and the euro also proved somewhat of a headwind for those UK listed companies with more of an international focus.   The FTSE 250 Index added +5.4%, while the FTSE 100 Index added +5.0%. 

Elsewhere, in the US, the S&P gained +5.2% as President Biden signed a number of executive orders aimed at regaining control of the pandemic.  In the Far East, markets also made progress, primarily driven by growth in China, with the MSCI Asia Pacific ex-Japan Index gaining +2.4%.  Meanwhile, in the Emerging Markets, the MSCI Emerging Markets Index added +1.4%.  Closer to home, Europe continues to struggle with its handling of the pandemic and delays in the rollout of the vaccines, however, the FTSE Eurofirst 300 Index managed to gain +3.1%. 

In the US, investors have been focussing on Biden’s rescue plan which, in addition to the Covid relief package approved at the end of December, could mean overall stimulus for the economy totals around 13% of GDP in 2021.  This is on top of the massive stimulus already delivered.  The additional stimulus cheques and unemployment benefits could lead to a significant acceleration in consumption, particularly once restrictions are lifted.  This will undoubtedly support the US economy in its recovery stage.  However, the huge size of the fiscal package has made some investors nervous that the pace of the recovery and inflationary pressures could result in some form of monetary tightening sooner than many investors had anticipated.  As a result of this we have seen a rise in bond yields, coupled with some weakness in equity markets, since the period end.  Nevertheless, Treasury Secretary and former Federal Reserve Governor, Janet Yellen reiterated her support for the fiscal plan, showing more concern about unemployment than inflation.  Economic momentum in the US remains solid with a number of manufacturing surveys continuing to show solid momentum, aided by this fiscal support which is boosting demand for goods.

In the UK, the vaccination campaign is progressing remarkably well and Boris Johnson recently announced a target of achieving full coverage of the adult population with a first vaccine by the end of July.  Furthermore he has also announced a gradual reopening, starting with schools at the beginning of March.  The economy remains in a precarious position as a result of the lockdown, with retail sales falling sharply in January, however the recent flash Purchasing Managers’ Index (PMI) survey surprised to the upside, indicating positive sentiment, with both manufacturing and services improving. 

In the Eurozone, delays in the rollout of the vaccine continue to have a negative impact on the economy in the region.  Many countries are having to extend selective lockdowns.  The ECB continues to provide unprecedented support whilst the European Parliament has also given the go-ahead for the Recovery and Resilience Plan.  This should help support the recovery and a rapid implementation could redraw investors’ attention to Europe, after years of net equity outflows.  From a macro-economic standpoint, the most recent PMI survey showed an improvement in the manufacturing index however the services index remained weak.  Consumer confidence has improved, albeit marginally, confirming lingering uncertainty over the outlook.

In the Far East, China continues to recover well from the pandemic despite a small rise in new cases that led to some mobility restrictions over the Chinese New Year holiday.  The Peoples Bank of China confirmed its intention to maintain a prudent but flexible policy stance which, buoyed by the continued good growth in the region, should support the recovery.