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It’s just over a year since the pandemic hit and with everything that’s gone on since (and still going on!), it’s easy to lose perspective on the general state of investment markets.

In this months’ blog, we take stock of where global markets are right now and some of the themes that could influence them over the course of this year.

Looking back

Global stock markets fell sharply in the early part of 2020 but bounced back strongly in the latter half (kudos to those that managed to hold their nerve and ride those waves) and has for the most part continued into 2021.

This swift recovery might seem counter-intuitive to some, particularly as the global economy itself is still in pretty poor health. The reason for this is simple – asset prices are influenced as much by expectations about the future as they are by what’s happening on the ground right now.

In other words, markets have been anticipating an economic recovery, so share prices have continued to rise on this expectation ever since the market lows following the pandemic.

What’s the outlook for this year?

There are still concerns and unknowns about how we’ll live with the virus but one thing’s for sure – the world is moving on from the pandemic.

The exact shape of the global economic recovery is hard to call but it’s most likely to be fast and unprecedented (yes, that word again) or just fast and substantial. Either way, it gives much cause for optimism but rapid growth comes with its own unique concerns.

Many companies have scaled back operations over the past year so if the supply of goods and services can’t meet the expected high levels of consumer demand, we might see prices start to rise. If inflation then begins to creep above central bank targets, they may then increase interest rates to prevent economies from overheating.

As we saw in March, neither bond or share markets tend to welcome rising interest rates, or even the prospect of them. But to a large extent this is a “known known” meaning it shouldn’t be a big surprise for markets if it does begin to materialise.

So what’s happening around the world right now?

UK & Europe

The UK has had to contend with both the pandemic and a small matter called Brexit.

We’re not great at giving ourselves credit where its genuinely due but the UK can give itself a jolly good pat on the back for its vaccine roll-out programme.

Whilst still a little way off pre-pandemic heights, the UK stock market recovery has been slow and steady. The same can be said of the UK’s progress in securing international trade deals but there are still plenty of challenges to overcome, especially for British companies trying to efficiently export goods to the EU.

Positive stories about Europe are thin on the ground even though core European equity markets have broadly outperformed their global peers – including the US – so far this year.

With a sluggish vaccine rollout and a renewed rapid spread of infections across the continent, restrictions look set to remain in place for the foreseeable future. This could well hamper economic activity by comparison to other parts of the world.

Fortunately, the latest data shows that the slump in Europe is not quite as bad as feared. The latest Purchase Managers Indices (a popular measure of business confidence) came in much stronger than expected across the Eurozone.

Right now, however, rising virus cases and the slow vaccine rollout are a key factor holding back EU businesses. This is understandable. Even if EU manufacturers can continue well enough in current conditions, a summer lockdown could be a serious setback for the hospitality-heavy economies of Greece, Spain and Italy.

However, the current pessimism could be exactly the reason to be more positive about European equities, as they’re one of the few asset groups still offering attractive valuations. European businesses have plenty of catching up to do, but it means their share prices have much more room to rebound.

US

Joe Biden has brought a welcome return to some sort of normalcy. ‘The first 100 days’ is often the most active period in every US presidency and so far, Biden and his administration seem determined to make every day count.

Last month, the $1.9 trillion American Rescue Act ensured direct payments were made to most adults of $1,400, along with $3,000 per child for lower income households. On the last day of the quarter, Biden’s administration also proposed $4 trillion of government-directed infrastructure spending over the next ten years.

That’s a lot of money to spend and invest. And while it’s no guarantee of anything, it’s a huge statement of intent. The US is aiming to emerge from the pandemic a much stronger and more inclusive nation than the one that entered it.

Emerging Markets (EMs)

Markets are excited and expectant for the global economic recovery this year and EMs tend do well in this type of transitional environment. Strong growth fuels demand for their products and the commodities they export, while financial conditions remain loose enough for companies to take advantage.

But before you bet the house on EMs, because global growth is expected to be mostly concentrated in the US, the recent rise in the value of the US dollar will raise the cost of their dollar-denominated debts.

Second, and perhaps more importantly, there are a number of different stories unfolding in various EM countries that dampen their particular growth picture. China – still considered an emerging market in investment circles – has disappointed lately, led by a deliberate tightening of policy. The well-documented health crisis in Brazil is placing severe pressure on its far-right government. Meanwhile, far-right Turkey continues to frustrate investors with its erratic policy decisions making the country virtually un-investable while Russia can’t seem to put its diplomatic scandals to bed.

There’s a lot to feel positive about in EMs but the sheer diversity of events and conditions within the sector means that professional investors and fund managers should look at EMs individually, not as a whole.

A robust plan

There are plenty of reasons to feel cheerful as the economic wheels begin to kick into gear but we know all too well that markets rarely perform in straight lines. This is why it’s so important that your investment portfolio or pension fund is sufficiently diversified to ensure you’re not over-exposed to specific risks.

To a large degree, your financial plan and future standard of living rely on you having a robust investment strategy in place. This doesn’t tend to happen by accident, so do get in touch if you want to understand how you can ready your investments for the year ahead.

Thanks for reading.

Simon