Investment Commentary February 2021

Over the last month, there has been heightened media coverage of stock market bubbles and, most eye-catching, battles between hedge funds and amateurs in previously little-known corners of the market. The revelation that a hoard of retail traders was able to wipe more than 50% off the value of a leading hedge fund and forcing them to unwind positions made great reading. Nevertheless, stepping back from the hot stocks and individual stories, global equities ended January at a similar level to where they started.

Retail investor participation and interest in the market spiking has historically coincided with relative highs inequities, with commentators citing the dot-com bubble as a previous example. While it is difficult to argue that equities are cheap, and there are undoubtedly areas of the market that are expensive, at an index level earnings continue to beat expectations, and valuation metrics are not stretched to extremes. Indeed, when compared to other assets, particularly fixed income, equities appear reasonable value.

Investors continue to be focused on the pathway of COVID infections and increasingly on vaccine rollouts. With widespread restrictions, the rate of infection has eased and as increasing numbers of people are vaccinated daily, there is hope for a boom in economic activity during the second half of the year. Many developed markets have seen elevated rates of saving by households, who have been unable rather than unwilling to spend. This suggests that as restrictions are eased consumer spending is likely to rebound rapidly, benefitting local economies disproportionately.

In the US, the new Biden administration is attempting to pass another COVID stimulus package of up to $1.9tn. With a majority of only one in the US Senate, it is likely that the final package will be watered down, although still sizeable. Additional payments to individuals, funds for schools and vaccine programmes as well as increases to the minimum wage are likely to be key components. The extent to which the stimulus package has been anticipated will drive its market impact, however, given the scale of spending and support already enacted as well as the exceptional monetary easing from the Federal Reserve, it is likely that any package passed will not have a significant bearing on the market direction.

While the outlook for the global economy and the COVID pandemic is improving, investors need to remain vigilant as it is unlikely to be a smooth pathway to recovery.  Issues with vaccine programmes in Europe and the emergent of new variants in the UK, South Africa, and Brazil illustrate that this issue is far from resolved.