Friday 9th April, 2021
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March was another strong month for equities as investor optimism about the pace of the global recovery from covid-19, and Biden’s massive (now totalling $5tn) fiscal splurge, buoyed developed market assets in particular, and the rotation into traditional value and cyclical sectors continued largely unabated. The positive move caps off a stellar first quarter for risk as a whole, with energy and HY credit joining equities in the steady march higher. Rising real rates and steeper sovereign curves, particularly in the US (where data have also consistently beat market expectations), have played a major role in driving the dispersion we have seen so far this year; and there has been a sharp, albeit partial, reversal of the ‘stay-at-home’ trade that was so much in vogue in 2020. The risk rally has continued despite continental Europe falling prey to a third wave of the coronavirus – amid a relatively sluggish vaccine rollout – and the spread of highly infectious new variants around the world. Safe havens have been the biggest losers from this reflationary momentum. Indeed, and having been one of the best performing assets last year, gold was down c.-10% in Q1 as tepid inflation combined with soaring nominal rates to boost the opportunity cost of holding the yellow metal. (The gold price has since rebounded in April, thanks to a correction in rates which we will discuss below.) However, one safe haven that was spared in Q1 was the US dollar. Uncle Sam has bounced back faster from the pandemic than most G20 countries thanks to the government having adopted a state-by-state approach to controlling the virus (which resulted in a looser regime of restrictions overall) and having implemented a colossal fiscal stimulus which drove a rapid recovery in household spending last year. US rates have been rising much faster than in Europe and Asia (where lockdowns are returning), and this has lifted the greenback and sent the euro in particular back down.
We think that the compression of risk premia and credit spreads and the rotation into value may have a little further to run given the severe underperformance of certain sectors last year, as well as the scale of fiscal and monetary support on offer in the US, Asia, and Europe. However, a correction now looks very overdue, and, as ever more investors pile into risk every day, the pool of potential future converts to the bullish case is dwindling fast. Who will be left to buy assets and push prices higher when everyone has already bet on the recovery? What positive news is yet to be priced into stock markets when major indices from shuttered economies are breaking new highs on a near-daily basis (as is the case for many in Europe this week)? Moreover, the pandemic is far from over – and further delays to re-opening are possible if resistant strains appear or vaccine nationalism takes hold in the big manufacturing countries. Brazil, Germany, France, India, Japan… the list of countries where the pandemic’s trajectory is decidedly negative just goes on and on; and DM Asia (not to mention the EM world) is yet to get going on building up herd immunity to any meaningful degree. Corporate balance sheets and global supply chains are still under extreme pressure today (just note the collapse of supply chain finance company Greensill Capital if you need any evidence for this statement), and some industries will be stressed for years to come. The momentum is with the bulls for now, but a one-sided bet on cyclicals is not the answer. Diversification and active management are the sensible way to proceed in this environment. And, in the long-term, the pandemic has only accelerated the adoption of new technologies, many of which have underperformed this year as ‘value’ has caught up with ‘growth’. Covid-19 has been the ultimate upheaval in an age of disruption. The new world is here – and here to stay.
In April so far, we have seen a wobble in the rotation-reflation story. Indeed, the first week of the month saw the largest decline in the US 10Y since June last year (following on from the third largest 3-month rise in a century in Q1). And the dollar has also slipped, suffering its largest weekly decline of the year so far. Inflation expectations were on the rise throughout Q1, and investors had begun to price in rate hikes – as early as next year in the US – despite pronouncements to the contrary from global central banks (most of which have committed to allowing above-target inflation while the global economy gets back on its feet). Dovish minutes released by the Fed and the ECB appear to have finally provided a reality check, and this has helped growth equites (and tech in particular) to outperform value this week: the NASDAQ is up +2.6% so far, ahead of the DOW at +1.1%. Where we go from here, at least in the very short term is anyone’s guess. But the uncertainty is precisely why balancing the risk exposures of our portfolios is the right way to go, mixing tactical positions with core holdings and long-term themes.
In April's news roundup, we look at some of the key movements and purchases including the return of US investment into the London real estate market to a ten-year high of £2 billion in Q1 2024. We also highlight some recent institutional office acquisitions in London.
In this article Neil Benjelloun, Bedrock’s Head of Private Markets, sheds some light on the growth of VC-funded purpose-driven businesses in solving the world's most pressing challenges. Sharing key insights and takeaways from a live Q&A session he hosted with Cameron McLain, Co-Founder and Managing Partner of Giant Ventures.
It is common to see members of the next generation in their 30s occupy a seat on the board of directors. This is desirable as it’s a very important interaction point with the business or the family’s assets, where they learn about strategy and create the family’s vision for the future. But as with most things, there is a good and a bad way to go about it. In this article, Maria Villax, Head of Family Strategy & Governance at Bedrock explores how next gens can prepare for a seat on the board.