There has been a sharp recovery in equity prices since November 2020 when Biden was elected as president and implemented a huge stimulus package for the US, plus there has been great optimism about the Covid vaccine roll-out in developed markets. It is interesting to see how the companies that initially benefitted from the Covid pandemic are now under-performing as markets return to a ‘more’ normal environment.
The question becomes, is this strong recovery sustainable? We know that most central banks are still stimulating their economies by adding massive fiscal stimulus, which is fueling developed market consumers with excess cash and savings. Central banks are maintaining low interest rates and our experience has certainly taught us not to bet against it.
We do believe that certain equity sectors are trading at demanding levels, but many sectors and stocks remain attractively priced as the global economic revival takes place and monetary and fiscal stimulus in developed markets assist companies to beat expectations by a handsome margin. This news flow fuels optimism that economic lockdowns have inflicted less damage than feared and that management teams (and their customers) have been able to manage around political and regulatory changes better than during the initial lockdowns. The US also plans infrastructure spending programs which all bode well for commodity prices and resource companies on the local bourse. The result is that we see investors rotating exposure out of expensive growth/technology stocks to value/cyclical stocks. Stock-picking is becoming more and more important in the current scenario.
There were concerns about the rise in the 10yr USGB yield driven by expectations of rising inflation. Bond yields retreated slightly from recent highs, and the US 10-year yield is trading close to 1.6%. This yield remains the barometer of risk sentiment and inflation fears. The recent stability in US yields was driven by the Fed firmly signaling that they remain in no hurry to withdraw monetary stimulus and will wait for higher inflation and employment gains to appear before they will consider hiking rates.
Since the US rates declined, commodity prices have surged again; especially metals like copper and palladium, and the oil price also held firm.
We remain constructively optimistic that we will be able to generate solid absolute returns in an environment where cash remains unattractive relative to most other asset classes.
Roeloff Horne
Director and Head of Portfolio Management
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