5th July 2021
The Cambridge Weekly
The great British summer may have struggled to materialise so far, but the end of the first half of the year
always brings an element of sunny optimism. We will comment on market and investment returns in more
detail next week, when the data has settled, but after what proved a quite decent 2020 for investors, the
first half of 2021 has again left investors with plenty to be positive about. However, investors with a higher
allocation to equities than bonds will have done much better than last year. Regular readers will know bond
markets have been a decisive factor for stock markets this year, and while compared to the first quarter
of 2021 they have calmed down, in the second quarter they remain a risk to lofty equity valuation levels.
On the back of calmer bond markets – and a significant rebound of the global economy – the second
quarter saw many equity markets close at all-time highs. Meanwhile, despite a notable recovery rally in the
second quarter, bond investors have not had it quite so good. This poses an important question against
historical observations. Can equities continue their rise despite a lack of upside for bonds?
Global half-time review
The jubilant scenes across England last week (or was it schadenfreude?) made for a nice ending to what
was at times a miserable first half of the year. Even with cases rising on the back of a surging Delta variant,
the vaccine rollout has all but ensured the next six months will not be as dreary as the earlier part of 2021.
This positive outlook has found its way into equity markets, with major indices continuing their rally
throughout the developed world. But for investors, the last six months have been overwhelmingly positive.
Buoyed by the promise of rapid vaccinations and reopenings, capital markets looked through the early
difficulties this year, and ahead to the strong economic recovery set to come.
This means that, with the recovery underway, markets are already at, or close to, their all-time highs. In
normal times, a bout of growth (and subsequent inflation) would result in tightening monetary policy from
central banks. And yet, central bankers around the world have been at pains to reassure the public they
will keep rates low, and liquidity flowing, for the foreseeable future. Last week, Bank of England Governor
Andrew Bailey used his Mansion House speech to hit back at claims from dissident ex-chief economist
Andy Haldane, that policy would need to tighten. Bailey’s confidently dovish tones are matched by those
of his global peers and – perhaps more importantly – it looks like capital markets fully believe them.
Green Bonds oversight
One of the more notable capital market trends of the last few years is that investors are increasingly going
green. We have seen this in the popularity of environmental, social and governance (ESG) investments
among the retail crowd – Tesla’s astronomical performance last year being a prime example. We wrote
last week about the growing size and maturity of carbon trading markets, which force polluters to buy
emission allowances and have become a genuine asset class of late. Another facet of this growing market
environmentalism is what happens in debt markets.