The Cambridge Weekly – 6th April 2021

The first quarter of 2021 was no April fool

The fact is that the first quarter of 2021 has brought genuine good news for UK-based investors with exposure to global stock markets. Equity markets have generally resumed an upward trajectory, while low risk assets, especially long maturity bonds, have sustained meaningful losses. Fixed income yields have risen on an increasingly positive medium-term outlook for the global economy. This improvement in outlook, and reversal of bond markets, also meant the turn of fortunes between the winners and losers of the pandemic year of 2020 that began last October has continued.

These changing investment dynamics are reflected in the returns picture for investment portfolios of differing styles. The income portfolio range – with an investment universe dominated by value stocks – has now outperformed for two consecutive quarters. Admittedly, it will still take more quarters like this for it to catch up with more unconstrained strategies.

Emerging Markets – post pandemic

Markets are excited, and expectant, for the global economic recovery later this year. As noted here many times, this brings changes in the prevailing investment parameters – the much-discussed cyclical rotation. Typically, emerging markets (EMs) do well in this environment: strong growth fuels demand for their products and the commodities they export, while financial conditions remain loose enough for companies to take advantage. For that reason, EMs are the classic global growth play.

Now, however, this story is a little more complicated. First, despite markets anticipating a strong recovery at the global level, growth expectations are concentrated on the US. While this in itself is a positive for EMs (as demand filters out) it has also led to a rise in the value of the US dollar in recent weeks – a negative for EM companies, as it raises the cost of their dollar-denominated debts.

Read the full commentary here