Stocks in all major markets have been performing well in recent months as economic conditions improve and some governments ease covid restrictions.
The immunisation program in many countries is gathering pace with over 2.4 billion doses of vaccines administered globally. The UK is 59.5% fully vaccinated and the US it’s currently 44%. Italy’s National Institute of Health has encouragingly found that infections, hospitalizations and deaths from covid-19 all declined significantly about 14 days after a first vaccine shot. Specifically, infections were 80% lower, hospitalizations were 90% lower, and deaths were 95% lower than for those who had not received any dose.
Signs of return to normalcy include the EU establishing a health travel pass from July 1st that allows incoming non-EU travellers who have either proof of vaccination, immunity due to past infection or result of a negative PCR test.
After central banks supported global capital markets with unprecedented liquidity over the last year, monetary stimulus will now be taking a backseat to continued fiscal stimulus. While the monetary stimulus remains, further monetary policy options remain limited. Notably, in the US, increase in the M2 money supply is reaching a staggering 26% annual growth rate.
Central banks are willing to let economies run hotter for longer. The IMF’s World Economic Outlook projects global growth at 6% in 2021 followed by a gain of 4.4% in 2022. This follows a historic contraction of 3.3% in 2020. The US, which has been a harbinger of growth amongst developed economies, had payroll numbers adding only a less than expected 266k jobs in April. Nonetheless, business activity remains robust as US Q1 GDP grew at an estimated 6.4% & the US composite purchasing managers index came in at 62.2 – the fastest expansion ever.
Given the low base levels following last year’s recession, supply-demand imbalances and excess liquidity the risks of inflation remain. The US Federal reserve has vowed to tolerate a period of above-target price rises so that the economy can get back on its feet with the Chair commenting “it is not even thinking about thinking” about raising interest rates. The concern is that high inflation could force the central bank’s hand. On May 12th US inflation rate increased to 4.2% in April – a rate not seen since 2008 and higher than the 3.6% that was expected. The S&P 500 was down 2% on that day.
For the time being, the Fed is seeing this inflation as transitory as it would logically take several quarters for supply-demand imbalances to normalise. Probabilities are that inflation will be structurally higher than during the last economic cycle. When demand is robust, businesses benefit from the growth effect of moderately higher inflation when reporting revenues & earnings in nominal terms.
Consequently, we maintain our positive stance on portfolios weighted towards globally diversified equities.