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There is a lot of market commentary at the moment highlighting record valuations, extraordinary recoveries and ‘bubble-like’ activity in markets.  Undoubtedly, there are sectors in which rational thought and analysis appear to have been superseded by hyperbole and speculation which has seen some large stock moves and heightened volatility.  However, we do not believe that global equity markets, in general, are displaying the euphoric characteristics which generally accompany a ‘bubble’.  Instead we see very unusual levels of liquidity and support by central banks and governments as the likely driver of rising asset prices.  Furthermore, expectations from an imminent exit from the pandemic, thanks to a rapid vaccination rollout, especially in the UK and US, continue to be a positive catalyst for markets and should help underpin the recovery. 

Governments remain focussed on a mix of pandemic control and support measures to ensure we get to the end of the pandemic as quickly as possible.  There are some concerns that the risk of a return of inflation could materialise in mid-2021 and some investors fear that it might result in tighter monetary policy sooner than many anticipated, fuelling a trend of rising bond yields.  Value versus growth rotations continue for the time being, supported by rising commodity prices and yields, as we progress towards the end of the pandemic.

The environment of low but rising bond yields emphasises the vulnerability of core fixed income to a potential rise in inflation and it is forcing investors to rethink the role of fixed income.  As we have mentioned previously, fixed income weightings, in general, remain near record lows when compared to history and we continue to look for alternative value in assets like infrastructure and certain sectors within the property market.  These have served portfolios well over the longer term and we continue to think they will play an important role. 

Despite the fact that some areas of the equity market remain expensive relative to history, for those clients with a reasonable time horizon, we continue to believe having a bias towards equity remains sensible.  The rollout of the Covid vaccine gives us hope, from an economic and personal point of view that a return to normality is within reach.  At this stage in the economic cycle there seems little reason to change strategy and we continue to advocate adopting a defensive stance with a focus on high quality investments, many of which are exposed to various long-term trends and opportunities (digitalisation, demographics and ESG issues for example), that are currently shaping our world.  

We continue to believe we can make further progress from here although in this environment, market volatility is likely.