The return on LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, stood at 2.0% on 11 February 2021. Over a 36-month period, the return stands at 9.5%. Global equity markets have got off to a positive start to the year, but delays in the vaccine roll-out and new virus variants have, to some extent, created uncertainty in the stock markets.
Continued injection of liquidity
The trend seen in 2020, whereby central banks are buying up both government and corporate bonds in conjunction with large-scale economic stimulus packages, looks set to continue in 2021. The new US President, Joe Biden, has therefore unveiled a major new stimulus package known as the “American Rescue Plan”. The package is worth 1.9 trillion dollars and is to be used, amongst other things, to roll out vaccination programmes, fund wage compensation schemes and finance Covid-19-related public expenditure at federal level. The US central bank, the Federal Reserve, signalled in January that it would maintain the current very low interest rate level. The reasoning was that the pace of the US economic recovery has slowed recently. Europe remains severely affected by coronavirus lockdowns, and there is no prospect of a rapid recovery in the eurozone economies. Leading economic indicators have therefore fallen slightly in January and February for both the US and Europe.
Although short-term economic growth is weak, there are still expectations of a strong economic recovery later this year as vaccination programmes are rolled out. This is due not least to the very accommodative fiscal and monetary policies in both the US and Europe. This has brought renewed focus on inflation, which historically has tended to rise during periods of accommodative monetary and fiscal policy. Last week, inflation rose in the eurozone, and inflation expectations in the US have risen quite significantly over the past month. In addition, we are seeing rising freight rates and commodity prices. The price of oil, for example, is approaching $60 per barrel, which is the highest level since May last year.
Rising inflation expectations are pushing up interest rates. This is particularly true in the US, where the yield on the ten-year US Treasury bond has risen to 1.20 per cent. This represents an increase of 0.7 percentage points since the middle of last year. The yield on German ten-year government bonds has also risen, but by nowhere near the same extent. This reflects the weaker economic performance in the eurozone.
Shares are rising on the back of strong financial results and low interest rates
The accommodative monetary and fiscal policies are also providing a tailwind for shares. The global share market, as measured by the MSCI World Index in Danish kroner, has risen by 4.7% year-to-date. However, the equity market fell back somewhat at the end of January. This was due to concerns about an overheated equity market and the EU’s mishandling of the vaccine roll-out. Furthermore, a large group of small retail investors in the US, organised via an online platform, succeeded in pressuring major hedge funds to sell off speculative share investments. This pushed share prices down even further.
The earnings season for the fourth quarter of 2020 is in full swing. So far, many companies have reported strong earnings, and there have generally been plenty of positive surprises. A company’s underlying earnings are the primary factor behind its market value, which is therefore also one of the main reasons why the stock market is currently rising.
It is clear that new coronavirus variants and delays to vaccine roll-outs are causing increased volatility in the stock markets. However, the market remains confident that the vaccination programmes will succeed in curbing the coronavirus over the next 6–12 months. In that scenario, restrictions will be gradually lifted and economic growth will gain momentum. This is creating positive market conditions for the time being.
