The Cambridge Weekly – 5th July 2021
Transition uncertainties
The great British summer may have struggled to materialise so far, but the end of the first half of the yearalways 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.
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
Past performance is not a guide to future performance.
The value of your investments can go down as well as up and you may get back less than you originally invested.
Source of financial market data: MorningstarDirect.
