An eventful first quarter for both the economy and financial markets*
Economic Review and Outlook: what about those house prices?
Economic news was mixed, but generally good, particularly in the ‘vaccinator economies’. Economic forecasts were on the way up, sometimes dramatically so. A big gap is opening up between the EU and the US. One is accelerating (big time), the other slowing down. We will leave you to guess which is which. This merits careful watching and, if sustained, will have big implications - for politics as well as economics.
Global stock markets, in euros, were up by roughly (depending on how we measure these things) 4.5%. That number conceals a lot of variation between countries and even more variation when it came to the investing style that your fund manager may, or may not, use.
Emerging markets, tipped by many an investment strategist, struggled to produce any meaningful returns. Those US bond yields again, plus an appreciating dollar.
If you had a ‘value’ manager - one who tries to buy cheap as opposed to ‘growth’ companies - they did very well, reversing a trend that has been around for years. If you can explain, meaningfully, the distinction between growth and value we’d love to hear from you.
The gold price, yet again, disappointed the inflation doomsayers and ended up back where it was at the start of the pandemic, down around 20% from the peak seen last summer. By contrast, Bitcoin, with volatility, delighted its followers. Bitcoin up, gold down are probably related. Evangelists think that Bitcoin has now supplanted gold in terms of a hedge against inflation in particular and just about any other risk they can think of.
Bonds, particularly of the US variety, had a torrid quarter. US Treasuries, according to Bloomberg, fell more than 4% something that hasn’t happened since the early 1980s. UK fixed income returns were, interestingly, even worse than in the US. European bonds did better than both the US and the UK but still delivered negative returns. Junk bonds - typically high risk corporate debt - did best of all, eking out positive returns in Europe and the US.
The dollar against the euro finished 2020 at 1.218 and ended the first quarter of 2021 at 1.173 confounding the rock solid consensus of 3 months ago that the dollar was in a secular bear market. The rise in US bond yields stumped the currency gurus. A reminder that bonds, at the end of the day, are nearly everything in financial markets. The other vaccinator economy in the G7 saw its currency rise against the euro, from 1.12 to 1.175. (0.983 to 0.851). UK tourists will get their bang for their pound should they ever be allowed to travel again.
A favourite bubble candidate for many is to be found in house prices. The chart, below explains why: house prices, almost everywhere, keep going up. There are large variations across countries but the trend is obvious. If it is a bubble there are no signs of it bursting any time soon. Perhaps that’s always the way with bubbles.
One or two well-known investors declared stock markets, and much else besides, to be in ‘the biggest bubble of all time’. Bubble spotting is a fundamentally unprofitable activity - unless you get it right, which is ferociously hard, if next to impossible, particularly in terms of timing.
Our money is on more of the same. Lots of chatter and worries about inflation, particularly in the US. Equities will go up and down, but, we think, mostly up. But more volatility must be expected - that US economy and its bond market. With much more Biden stimulus to come, the US economy is on fire. Whether the fire burns out or becomes uncontrollable matters. A lot. We are all fire-wardens now.
*Nothing in this newsletter should be construed as investment advice or an investment recommendation. You should consult your own qualified and regulated adviser(s) in that regard. All quoted data believed to be accurate but subject to errors and revisions. Past performance is no guide to future returns.