March 2021 Review
Reflating & Re-floating
There were a number of moving parts to financial markets in March, perhaps more than usual. The pursuit of normal, or a new normal, continued to progress in the UK and US due to the efficient roll-out of vaccinations in both countries.
This was less apparent in the European Union where a clear lack of vaccination logistics organisation was masked as a blood clot side effect problem associated with the AstraZeneca variety. This was later retracted as the data evidenced proved the risk to be inconsequential when compared to the vaccine’s benefit for key age groups. The EU’s attempts at vaccination brinkmanship left it with some oeuf-en-visage to be frank, as new surges in Covid-19 infections brought about fresh lockdowns across parts of Europe.
There were clear signs from the central banks of the US, UK, EU and Japan that monetary policy as manifested by official short term interest rates, would remain anchored at low current levels, the emphasis remains on reflating economies and letting inflation run above target for a period of time with a focus in the US on lowering unemployment.
With the passing of the America Rescue Plan adding a US$1.9 trillion stimulus to the economy and a further substantial infrastructure stimulus plan in the wings, inflationary fears continued to unnerve bond markets with the US ten-year yield rising again to close the month at 1.73%. Equivalent UK government (gilt) yields edged higher to 0.84%.
Growth stocks yielded to this valuation pressure, continuing to underperform their ‘value’ counterparts. To us this seems a touch one-dimensional, as the growth themes we invest in should continue to be supported by favourable supply/demand dynamics and earnings, whereas the so-called ‘value’ stocks rising on economic re-opening hopes are populated by challenged businesses overly reliant on debt/leverage, high volumes and low margins.
Still, it’s not unreasonable to see some clawback of the significant outperformance of growth themes over the past twelve months. By way of illustration, the US S&P 500 index rose by over 4% in March whereas the Nasdaq 100 index struggled to post a moderately positive outcome of just under 0.5%.
Aiding all equity markets to some degree is the abundant liquidity provided by a number of governments and their central banks. Additionally, and especially in the US, the SPAC (Special Purpose Acquisition Companies) boom is providing an impetus to valuations. Abundant liquidity and an improving economic backdrop proved positive for small cap stocks.
The UK equity market, for so long buffeted by political concerns – not least those related to Brexit, found its relative cheapness allied to an eye-catchingly proficient vaccine roll-out, attracted investors in the UK and from overseas. Commodities endured a lacklustre month.
While March started with a rather benign budget delivered by the UK Chancellor of the Exchequer, the end of the month was marked by two quite different influences. The losses incurred by Bill Hwang’s Archegos hedge fund and the subsequent selling off of equity exposures had an impact on the US equity market, while those investment banks extending credit lines to Archegos suffered varying degrees of losses ranging a few billion dollars to only one or two.
A problematic side effect of abundant liquidity and very low short term interest rates is it can promote leverage and excessive risk taking. The US Federal Reserve and US Treasury Secretary will be taking a close look to see how easily Archegos could be repeated.
That event was literally overshadowed by the vast containership, Ever Given, getting stuck in and blocking the Suez Canal. Not a great advertisement for the ship’s owners, Evergreen, whose name was emblazoned on the port and starboard of the vessel.
This event served to remind observers how quickly supply chains can be disrupted. The Ever Given was floated on a high tide six days after it ran aground on March 23rd. By the time of its release, some 400 ships were backed up waiting to pass through the canal. An estimated £7 billion worth of goods passes through the Suez Canal each day.
Bonds continue to offer little to no value whether they be government or corporate. The latter continue to trade on historically low spreads to their government counterparts.
In equities, we continued to trim last year’s winners in favour of further cyclical growth exposure in the relatively unloved UK equity market. Industrial metals remain a logical allocation to reflect expected supply constraints as the global economy picks up speed.