The return on LD Discretionary, which is the largest investment fund at The Cost-of-Living Allowance Fund, stood at 4.3% on 24 June 2021. The return over the last 36 months stands at 13.2%. Throughout the spring and early summer, there have been healthy rises across all risk assets, which have contributed to the positive Return.
Bullish stock markets
Global equity markets continue to deliver strong returns. The stock market – as measured by the MSCI World Index – is currently yielding a return of 13.6%, whilst the leading Danish share index – as measured by the OMX C25 – is yielding a return of 9.7%. Positive growth prospects, in line with the roll-out of vaccines and the further reopening of society, are helping to drive up prices of risk assets. In addition, accommodative monetary policy in both the US and Europe is supporting both growth and the stock markets.
The US 10-year yield rose to 1.8% in the first quarter of 2021, but has fallen during the second quarter to around 1.5%. By contrast, European yields have continued to rise, and the yield on German 10-year government bonds has risen from -0.65% at the start of the year to -0.15% in June 2021. Danish mortgage bonds have faced a difficult year in 2021. High property turnover in Denmark has resulted in large issues of mortgage bonds as well as subdued buyer interest. This has led to falling prices for convertible mortgage bonds. However, the market for Danish mortgage bonds is expected to normalise during the third and fourth quarters of 2021.
Economic growth and accommodative monetary policy
The key themes in the financial markets remain strong economic growth, rising inflation and central bank policy. The easing of Covid-19 restrictions and the gradual reopening of the global economy have led to strong economic indicators. Leading indicators for both US and European growth remain very positive. The services sector, in particular, has got off to a strong start again. The positive growth and economic activity are driving up demand for consumer goods, commodities and industrial materials, which has helped to push up inflation expectations. Furthermore, private sector savings have grown significantly over the past year, which is now translating into increased consumption as COVID-19 restrictions are eased.
One of the few areas in the US where the effects of Covid-19 are still being felt is the labour market. Unemployment currently stands at 5.8 per cent, which is relatively high by American standards. Before the coronavirus crisis, US unemployment stood at just 3.5 per cent. Demand for labour is rising, and it is likely only a matter of time before employment returns to pre-coronavirus crisis levels. The phasing out of extraordinary unemployment benefit top-ups is expected to contribute to this trend.
The central banks in the US and Europe are maintaining an accommodative monetary policy. This means very low short-term interest rates. At the same time, both the US and European central banks are continuing to buy government bonds, which helps to keep even long-term interest rates at a low level. This accommodative monetary policy has long been a factor in driving up prices of shares and other risk assets. Consequently, there is increasing scrutiny of every statement from the US central bank, the Federal Reserve. The market is focusing in particular on the rhetoric surrounding the current monetary policy and on whether there are any signs or signals of changes to monetary policy. The most recent press conference by the US central bank briefly caused some turbulence in the financial markets. This underlines the fact that central banks are currently playing a crucial role in developments in the financial markets.
The positive growth outlook and continued accommodative monetary policy are also expected to continue to support a risk-on market with rising share prices. LD Pensions believes that this scenario will continue throughout the summer. The focus going forward is on the US labour market, higher inflation and changes in monetary policy in both the US and Europe. In this context, it is expected that the financial markets will experience periods of greater uncertainty and, consequently, greater volatility.
