The return on LD Discretionary, the largest investment fund at The Cost-of-Living Allowance Fund, stood at 3.5% on 27 April 2021. The return over the last 36 months stands at 13.2%. The mood on the financial markets is predominantly positive as a result of the vaccine roll-out and continued accommodative fiscal and monetary policies.
Reopening and rising real interest rates
The vaccine roll-out has begun to gather pace in the US, Europe and globally. The combination of mass vaccination and the prospect of society reopening during April and May is prompting the financial markets to react to the prospect that the Covid-19 pandemic may be drawing to a close and that economic activity will soon return to normal. One result of this has been rises in interest rates in both the US and Europe throughout the first quarter. Long-term bond yields, in particular, have risen. US 10-year government bonds rose from 1.00% to 1.75% between mid-January and the end of March. However, long-term yields have fallen slightly again in April and have stabilised at a level 0.15–0.20% lower.
Inflation expectations also remain high in both Europe and the US. The Danish market for convertible mortgage bonds took a dip in March, partly due to interest rate rises and partly because new loan issuance was surprisingly high, whilst demand in the bond market did not quite match this.
Bullish stock markets
In the US, President Joe Biden and the Democratic Party introduced yet another major fiscal stimulus package for American citizens. At the same time, average savings have increased for both Americans and Europeans, and monetary policy remains very accommodative. In many places, central banks’ government bond-buying programmes are still in place. All these factors are helping to push up prices of risk assets, such as shares and high-yield bonds. Many investors have chosen to invest their increased savings in shares, which is positive for the market.
We have seen rises across almost all types of shares. The cheaper value shares, such as European banks and commodities/energy companies, rose nicely in January and February. In March, it was the classic quality and growth shares, including large technology companies, that delivered good returns. Year-to-date, global shares (MSCI World Index) have returned 10.1% measured in Danish kroner.
The trend seen in the first quarter of 2021 is also continuing into the start of the second quarter. Leading indicators of future economic activity reached historically high levels in April. Figures for the services, production and manufacturing sectors respectively point to strong economic activity, and the latest figures published for retail sales and the labour market have exceeded expectations.
Trees don’t grow to the sky
These high figures are, of course, positive for the market, but at the same time there is a risk to be aware of. The coming months will be characterised by uncertainty and nervousness in the market. Good news is likely to push share prices higher, prompting investors to turn to riskier assets. Conversely, negative news could quickly be interpreted as a sign that the market has peaked, which in turn could cause share prices to fall.
