INVESTMENT MARKET UPDATE
Despite the global impact of Coronavirus, the investment market looks to be in good shape.
At Financial Framework, we have a strong investment proposition having applied both qualitative and quantitative measures to the entire investment market to screen out providers who do not share our investment philosophy or who have not provided sufficient value to investors. We recommend suitable, risk mapped solutions to clients wishing to invest to accumulate wealth and, where they can, invest in a tax efficient manner with the aim of building a pot which can be used to supplement retirement income or to provide an inheritance.
The following is an overview of the current investment landscape and what the wider issues in society mean for investments. We are grateful to one of our investment partners, Alpha Portfolio Management, for their input in this update.
THE IMPACT OF CORONAVIRUS
As with most things these days, we start with the impact of Coronavirus. Encouragingly, both the UK and US have given over half of their adult population one dose of a Covid-19 vaccine and are making good progress with the second jab. The European Commission appears to also be making progress, having ordered enough doses to cover 70% of the adult population by mid-July. The 70% number is significant, as experts believe it to be the threshold for herd immunity.
Progress on the vaccination, together with pandemic prevention measures, is allowing more countries to exit from lockdown. The easing of lockdown and release of pent-up consumer demand, together with the massive stimulus packages from some governments, should drive a significant pick-up in economic activity in the second half of the year. This should continue to support risk assets.
The UK economy is now set to grow at its fastest rate since the Second World War. After an extreme contraction last year, the rebound in the economy should see the UK growing faster than the US and Europe. Unsurprisingly, the Bank of England has indicated that it intends to scale back its government bond purchase programme, amid rising optimism about the economic outlook and with the easing of restrictions related to the Coronavirus.
However, challenges remain. Government stimulus measures and global supply chain issues have raised the prospect of inflation. We are seeing a significant surge in raw materials and other input costs, with a number of sector-specific shortages creating bottlenecks. But both central banks and consensus continue to see an uptick in inflation as transitory. However, higher prices should also be supported by a booming consumer demand and even some potential tightness in labour markets. Therefore, we consider the possibility that markets are being complacent and see upside risk in bond yields, a key investment vehicle.
Coronavirus has not gone away and the risk from new strains of the virus remain, with India of particular concern. As long as current and new vaccines are able to offer protection against new strains then the widely anticipated global economic recovery should not be blown off course. We note that India is the largest exporter of Covid-19 vaccine doses and, as a result of the current crisis, other countries around the world, in particular lower income nations, may have to wait longer to receive their doses.
China was ‘first-in and first out’ of the global pandemic so it is encouraging that economic activity re-bounded strongly in the first quarter of 2021 as it passed the anniversary of lockdown. In the US, West Coast ports have broken new records for imports, as American retailers stock up ahead of an expected surge in consumer spending driven by President Joe Biden’s stimulus and the rapid vaccine roll-out.
Meanwhile, in the UK, consumer sales in March were well ahead of expectations even before the full re-opening of non-essential outlets, adding weight to the case for a consumer driven economic recovery in the second half of 2021.
UK and US vaccinate over half of their adult populations with one dose
India reports deadly second wave of infections with new Covid-19 variant identified
IMF raises its global economic growth forecast for 2021 from 5.5% to 6%
US stock market touches record high and UK back above 7,000 on vaccination progress
Bank of England forecasts UK economy to grow at fastest rate since World War II
Bank of England indicates intention to scale back QE
UK trade figures for February show a strong recovery in exports to the EU
European PMI readings show business optimism at a three-year high
US retail sales recover strongly in March with households receiving pandemic relief payments
Japan’s exports jump 16% in March helped by strong economic recovery in China
China’s economy grows by 18.3% in the first quarter of 2021
Overall, the global economic picture is highly encouraging, albeit not without some risks. While the government stimulus measures should fuel a global economic recovery, these come at a cost. There are increasing signs that taxes will have to rise to pay for Covid-19 relief measures. Likewise, central banks have to tread a careful path and, at some stage, are going to have to start considering tapering of QE stimulus measures. The European Central Bank and the Bank of England have both made similar comments and, as a result of upgrades in economic forecasts, current levels of asset purchases are likely to be scaled back.
The economic recovery looks as if it should be underpinned by the release of pent-up consumer demand. However, the bill for providing pandemic lockdown relief, which is still to be finalised, is frightening. For example, UK government debt has ballooned to over £300bn!
All this points to managing your investments and retirement planning carefully. And that’s where we come in. If you’d like to discuss how to make the most of your investments, we’d love to help.