The last four or so weeks have been more important than they’ve looked. Q1 was full of back-and-forth shifts, as investors tried to get to grips with how the re-opening of economies would unfold, and what implications that might have on variables such as interest rates and inflation.
Their biggest concern, counterintuitively, has been that economies will come roaring back, fuelling a spending boom. In that environment prices would rise, and policymakers may have no choice but to reduce support and increase interest rates. At the other end of the spectrum, there have been times where investors have flipped to worry that new variants will overtake, and we will be stuck in a cycle of repeated lockdowns. There is likely to be some middle ground over the coming months, as even if COVID numbers fall, in the near term the threat from mutant strains will hang around in the background.
As we welcomed the lighter nights, April brought more visibility from an investment perspective. On the one hand, progress continues in countries like the UK where vaccination rates are high. Cases are consistently falling by around 20% per week here, so it seems highly likely the next stages of the roadmap will be able to proceed as planned, with the vaccination programme hopefully reaching younger people before they have chance to create a meaningful spike. On the other hand, despite the ongoing relaxation, the vast majority of people are likely to remain cautious for some time, somewhat self-regulating both the economic recovery and COVID. The combination should lead to nice, steady improvement across the summer, with booster vaccines and perhaps some low-level restrictions being required in the winter. That is our base case for the US, UK and Europe (even if slightly further behind), and its one that investors started to see as more realistic across April.
What are the implications then? Well, that outlook would generally be a positive one for riskier assets, though instead of the battle between the COVID winners and recovery winners being played out, it should be more about the underlying business’ and what they can deliver in an adapted new world. Therefore at the moment we prefer buying active funds who can target these specifics, instead of just buying a passive index.
Our central case should also lead to greater stabilisation in bond returns, as without a huge consumer spending wave, policymakers are likely to keep supporting the system. Interest rates and inflation staying reasonably contained should allow 2-3% per annum from fixed income from here, though we think this may be front end loaded, so depending on how our expectations play out, we could be looking to reduce this part of our portfolio’s into Q3.
So some of the big shifts in Q1 have reversed and stabilised in April. As such, It was pleasing to see the portfolios perform strongly, adding between 1.10% (Very Low Risk) and 4.75% (High Risk) on the month. Positive contributions to those returns came from a variety assets, which is pleasing in terms of consistency. We remain focused, to keep building on the last few years of great outcomes over the months ahead and barring any black swan events (which we always need to be mindful of), the environment is set-up positively, which should continue to suit our pragmatic and active approach.