The return on LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, stood at 6.5% on 15 September 2021. The return over the last 36 months stands at 15.8%. It is particularly the positive performance of the equity markets that is driving up the return. The reopening of the global economy and continued accommodative monetary policy have thus contributed to strong returns on the global equity markets.
Rising share prices and a global slowdown in growth
Over the summer, there have been healthy rises in the equity markets, with leading global share indices reaching new record highs. The MSCI All Countries index has risen by 20.5% this year, measured in Danish kroner. The Danish stock market has risen by almost as much. Year-to-date, the leading Danish OMXC25 index has risen by 17.3%.
Up to and including July, key economic indicators in both the US and Europe have been positive. Consumer confidence, employment and the services sector have shown clear signs of improvement. Leading indicators of economic growth in the US and Europe have edged down slightly but remain at high levels.
The risk of further lockdowns following a new wave of Covid-19 infections is currently relatively low in countries where the proportion of people who have been fully vaccinated is high. This includes many European countries, amongst them Denmark. In the US and many Asian countries, as well as New Zealand and Australia, the proportion of people who have been fully vaccinated is significantly lower than in Europe. The risk of both local and national lockdowns is therefore also much higher. This has caused many problems for value and supply chains, both regionally and globally. Looking ahead, this represents a source of risk for global equity markets.
The combination of economic growth, rising employment and accommodative fiscal and monetary policies is contributing to rising inflation. It is clear that inflation is on the rise in both the US and Europe. The same trend applies to wages, which are currently rising relatively sharply, particularly in the US.
Focus on share buyback programmes
The exceptionally accommodative monetary policy pursued by central banks in both Europe and the US has long helped to underpin the positive performance of the financial markets. Investors are currently looking for signs as to whether this accommodative monetary policy, including large-scale bond purchases, is set to be scaled back. News of a rollback of bond-buying programmes could prompt some investors to sell off their shares, which could lead to increased turbulence in the equity markets.
Expectations of a slight tightening of monetary policy, particularly in the US, are also reflected in the fixed-income markets. Yields on both 10-year US and 10-year German government bonds have been falling steadily, particularly in June and July 2021. However, since August, yields have been rising slightly. US government bonds are now trading at around 1.3–1.4 per cent, whilst German 10-year government bonds have risen to -0.3 per cent.
Danish mortgage bonds have had a difficult year in 2021. Convertible mortgage bonds, in particular, have struggled. This is partly due to a high level of new issues in the wake of the very high volume of property sales in Denmark in the first half of 2021. The market has struggled to absorb the large supply of convertible mortgage bonds. As a result, the Danish mortgage bond market has been among the bond markets in Europe with the lowest returns in 2021.
Generally speaking, LD Pensions takes a positive view of the financial markets over the next 6–12 months. High levels of economic activity, rising employment and persistently low interest rates are expected to underpin the positive trend in the financial markets. However, a minor correction in the equity markets would not be unusual following a very long period of steadily rising equity markets.
