15th March 2021
Stock markets around the world have had another choppy week, but this time there was more up than
down across the board and bonds yields stopped their upwards trend – at least for a while. The general
upward trend notwithstanding, there was a lot of rotation and counter rotation between different market
segments. With the tech heavy US Nasdaq index going through the wildest of the week’s roller coaster
rides – first down a lot then up a lot only to then sell off again – it does look as though markets are still
undergoing a recalibration phase.
This makes sense, given rising yields (on the back of a vastly improved near-term economic outlook) mean
that stock markets have to learn to stand on their own feet again, rather than relying on being the only
(investment return) show in town, while governments take care that risk of corporate failures are mostly
contained compared to traditional recessionary periods. Valuations metrics are beginning to matter again
and, just as the stay-at-home-economy of lockdowns had its winners and losers, so will ‘the catching up’
recovery that lies ahead.
US stimulus bazooka?
Despite the harsh economic realities of the pandemic, capital markets have had a staggering amount of
confidence over the last year, all things considered. Vaccine hopes have undoubtedly played a big part in
this – as can be seen in the fact that investors have rewarded those nations with advanced vaccination
programs and punishing those falling behind. But perhaps even more important for the medium-term
outlook is fiscal stimulus. Governments around the world have spent more since the beginning of 2020
than most would have thought possible. Much of this has been aimed at emergency support – bridging the
funding gap between now and normal – but, more recently, fiscal outlays are being aimed at investing in the
China stimulus dud
Economic growth, particularly over the long-term, is notoriously hard to predict. So, it makes the job a
little easier when someone tells us outright what is going to happen. The Chinese Communist party
fortunately revels in such tasks. Last week, the party released the People’s Republic’s 14th Five Year Plan,
setting out growth and development targets until the middle of the decade. With China now the world’s
largest economy in terms of purchasing power parity, these economic plans are hotly anticipated affairs.
Past five year plans have included explicit pledges to reach designated GDP growth numbers – such as the
“above 6.5%” level set from 2016-2020.