A selection of articles looking back through the markets last month.
Global Market Review
Optimism drives share prices in April
Global equity markets generally rose during April, buoyed by encouraging economic data from the US. The International Monetary Fund (IMF) upgraded its forecasts for global growth from 5.5% to 6% in 2021 and from 4.2% to 4.4% in 2022 but warned that policymakers will continue to face challenges from an uneven global recovery and a widening gulf between rich and poor. Meanwhile, the global death toll from Covid-19 exceeded three million during April, according to Johns Hopkins University, and Director General of the World Health Organisation (WHO) Dr Tedros Adhanom Ghebreyesus warned that “cases and deaths are continuing to increase at worrying rates”.
“The eurozone slipped into a “double-dip” recession”
In the US, President Biden marked his first 100 days in office by announcing further spending plans worth around US$4 trillion. The American Jobs Plan and the American Families Plan will focus on employment, education, welfare, and climate change, but will still need to be approved by lawmakers. The US economy expanded at an annualised rate of 6.4% during the first quarter of 2021, having grown by 4.3% during the final three months of 2020. Concerns that the economy might be in danger of overheating were compounded by a rapid increase in the rate of consumer price inflation; however, the Federal Reserve (Fed) dismissed the rise as “transitory”. The Dow Jones Industrial Average Index rose by 2.7% over the month.
In the UK, the FTSE 100 Index breached 7,000 points for the first time since before the coronavirus pandemic took hold, boosted by intensifying optimism about domestic and global economic recovery. The UK continued its gradual reopening from lockdown and the Office for National Statistics (ONS) reported a sharp increase in economic activity: as non-essential shops reopened from 12 April, sales of “delayable goods” such as clothing and furnishings rose above pre-pandemic levels, reaching 110% of their February 2020 level. During April, the FTSE 100 Index climbed by 3.8%.
The eurozone slipped into a “double-dip” recession, having tipped back into recession during the first three months of 2021. President of the European Central Bank (ECB) Christine Lagarde warned that the risks to Europe’s economy associated with the Covid-19 pandemic remain tilted to the downside in the short term; in the longer term, however, risks to the economic outlook have become “more balanced”. The Dax Index rose by 0.8% during April.
Emerging Markets Review
India struggles with second wave
The global death toll from Covid-19 exceeded three million during April, according to Johns Hopkins University, and India reported record levels of new Covid-19 cases alongside reports that its health care system was struggling to cope. Nevertheless, credit ratings agency Fitch affirmed India’s “BBB-“ sovereign rating with a “negative” outlook; Fitch believes that, although the second wave may delay India’s recovery, it is unlikely to derail it. Fitch forecasts economic expansion of 12.8% in the current fiscal year, which ends in March 2022, moderating to growth of 5.8% for the following fiscal year. The CNX Nifty Index fell by 0.4% during April.
“China’s economy expanded at a record rate of 18.3%”
The pace of consumer price inflation in Brazil eased slightly during April as fuel costs rose at a slightly slower rate. Having risen by 0.93% between mid-February and mid-March, consumer price inflation posted a month-on-month increase of 0.60%. On an annualised basis, consumer prices rose by 5.52% in the year to mid-March and by 6.17% in the year to mid-April. Brazil’s key Selic interest rate is predicted to rise to 5.5% this year, according to a survey undertaken by the country’s central bank, as the inflation outlook for 2021 climbed to 5%. The Copom – the central bank’s interest-rate-setting committee – is widely expected to increase the Selic rate at its next meeting, having raised it in March by 0.75 percentage points to 2.75%. The Bovespa Index rose by 1.9% during April.
According to Fitch, Latin American sovereigns have the highest proportion of “negative” outlooks – 47% – of all the emerging market regions. Three sovereign issuers – Chile, Panama, and Suriname – have been downgraded since the fourth quarter of 2020; meanwhile, Peru’s outlook was downgraded from “stable” to “negative”. Although the region is expected to benefit from strong growth in China and the US, higher commodity prices and an accommodative external backdrop, it remains vulnerable to the risk of tighter financing conditions, the evolution of the coronavirus, and the success and speed of vaccine programmes.
China’s economy expanded at a record rate of 18.3% during the first three months of 2021, although this substantial jump should be measured in the context of weakness in the same period last year: the country’s economy contracted by 6.8% during the first quarter of 2020 as the pandemic took hold. The Shanghai Composite Index edged 0.1% higher over the month.
Europe Market Review
“Double-dip” recession for Europe
Having slipped back into recession during the first three months of 2021, the eurozone fell into a “double-dip” recession. At country level, Italy slid back into recession, reporting an economic contraction of 0.4% during the first quarter; in comparison, France posted growth of 0.4% following a fourth-quarter contraction of 1.4%. Meanwhile, having expanded by 0.5% in the final three months of 2020, Germany’s economy shrank by 1.7% during the first quarter of 2021, partly undermined by the withdrawal of a temporary reduction in the rate of VAT. The International Monetary Fund (IMF) upgraded its forecast for economic growth in the euro area this year from 4.2% to 4.4%, and next year from 3.6% to 3.8%. The Dax Index rose by 0.8% during April, while the CAC 40 Index climbed by 3.3%.
“We are very much at an inflection point”
(ECB Chief Economist Philip Lane)
President of the European Central Bank (ECB) Christine Lagarde warned that the risks to Europe’s economy associated with the Covid-19 pandemic remain tilted to the downside in the short term; in the longer term, however, risks to the economic outlook have become “more balanced”.
In an interview, the ECB’s Chief Economist Philip Lane said that the ECB expects a good economic recovery for the eurozone throughout 2021 but warned: “We are very much at an inflection point … the fact that we’re rebounding from the worst of it does not mean there’s a full recovery”. The ECB expects a “slight contraction” in the eurozone’s economic output during the first three months of the year, but sees the economy growing in May and June, and “even more strongly” in the third quarter.
The European Parliament ratified the post-Brexit trade deal with the UK during April. The Trade and Cooperation Agreement (TCA), which was agreed in December, allows tariff- and quote-free trade between the EU and UK. Although the deal was hailed by the UK, European politicians tended towards a different view. Guy Verhofstadt said the agreement was “a failure for both sides but better than nothing”, and Brexit negotiator Michel Barnier commented: “(Brexit) is a warning … And it’s a failure of the EU and we have to learn lessons from it”. Meanwhile, European Commission President Ursula von der Leyen said the agreement comes with real teeth, with a binding dispute settlement mechanism … we will not hesitate to use them if necessary”.
Global Bond Market Review
Default rates set to remain high?
Sovereign defaults hit record levels during 2020 as the coronavirus pandemic and falling oil prices weakened credit quality. According to S&P Global Ratings, seven sovereigns defaulted during the year, having all begun 2020 rated “B” or lower. The highest-rated sovereign to default during 2020 was Suriname (rated “B”); Ecuador and Belize were rated “B-“ at the beginning of the year; Zambia, Lebanon and Argentina were in the lowest-rated category of “CCC”/”CC”. Meanwhile, 26 sovereigns were downgraded over 2020; most were speculative-grade issuers from emerging or frontier markets. S&P reported that, by the end of 2020, there were seven sovereigns rated “CCC+” or below – the lowest rating levels – which suggests that default rates could remain “elevated” over the next few years.
“Policymakers will continue to face challenges from an uneven global recovery”
The International Monetary Fund (IMF) upgraded its forecast for economic growth amongst emerging markets and developing economies this year from 6.3% to 6.7%, and maintained its growth prediction for next year at 5%. The IMF also upgraded its forecasts for global expansion from 5.5% to 6% in 2021 and from 4.2% to 4.4% in 2022. However, the IMF warned that policymakers will continue to face challenges from an uneven global recovery and an increasing gulf between rich and poor. The IMF believes that “uneven recoveries are … occurring within countries as young and lower-skilled workers remain more heavily affected … Because the crisis has accelerated the transformative forces of digitalisation and automation, many of the jobs lost are unlikely to return”.
The yield on the ten-year US Treasury bond fell from 1.74% at the end of March to 1.65% at the end of April, having begun the year at 0.93% at the start of the year. Meanwhile, the yield on the benchmark German government bond continued its climb, ending April at -0.20% compared with -0.30% at the end of March and -0.56% at the beginning of 2021.
Investors’ interest in fixed-income funds wavered slightly during March, according to the Investment Association (IA), which reported a sharp increase of inflows into mixed asset funds and equity funds. In comparison, net retail inflows into bond funds fell from £1.4 billion to £1.03 billion. Although much of this decline was attributable to sizeable outflows from the £ Corporate Bond sector, the Global Bonds sector remained out of favour, experiencing outflows of £520 million during the month.
UK Bond Market Review
Inflation picks up
Public sector borrowing rose to £303.1 billion over the year to the end of March 2021 – £246.1 billion more than in the year to March 2020 and representing the highest level since records began in 1947. The ten-year UK gilt yield ended April largely unchanged at around 0.84% but dipped as low as 0.73% during the month.
“Optimism among UK manufacturers reached its highest level since 1973”
The BoE has overtaken overseas investors and pension funds and insurance companies to become the largest holder of UK government bonds. According to the Debt Management Office (DMO), the BoE held almost £742 billion-worth of UK gilts on its books as at the end of September 2020 – equating to 30.5% of gilts – whereas overseas investors held around £659 billion and pension funds and insurance companies held almost £693 billion. The proportion of gilts held by the BoE has swelled following its programme of quantitative easing. The BoE intends to continue its asset purchases until the end of 2021, and prices are widely expected to drop – and therefore yields to rise – when the central bank finally withdraws its support.
Having shrunk by 2.2% in January, the UK economy expanded by 0.4% during February, but was 7.8% smaller than in February 2020. UK economic output accelerated during April at its most rapid rate since November 2013, according to IHS Markit. Growth in the services sector outstripped growth in manufacturing for the first time since the beginning of the Covid-19 pandemic.
The Confederation of British Industry (CBI) reported that optimism among UK manufacturers reached its highest level since 1973 during April as companies drew encouragement from the gradual reopening of the economy. Nevertheless, many businesses are concerned about the prospect of rising costs which could put upward pressure on prices.
The rate of unemployment fell from 5% to 4.9% over the three months to February. Over the year, UK payrolls have lost 813,000 jobs. 19% of the workforce remained on furlough. The annualised rate of consumer price inflation rose from 0.4% in February to 0.7% in March, stoked by higher prices for motor fuels and clothing. Following a 42% drop in exports from the UK to the EU in January, shipments to the EU increased by 46.6% during February, although export levels remain below February 2020 levels. Imports from the EU rose by 7.3% following a decline of 29.7% in January.
UK Equity Market Review
Mid-caps hit new highs
The FTSE 250 Index, whose constituents tend to be more exposed to the UK economy, hit a new all-time high during April, stoked by renewed optimism over the UK’s prospects as the economy continues to reopen. Elsewhere, the FTSE 100 Index breached 7,000 points for the first time since before the pandemic. Over April, the FTSE 100 Index climbed by 3.8%, while the FTSE 250 Index by 4.5%. Since the start of the year, the two indices have risen by 7.9% and 9.8% respectively.
“Sales of “delayable goods” such as clothing and furnishings rose above pre-pandemic levels”
The International Monetary Fund (IMF) expects the UK economy to recover more strongly than previously thought. The IMF upgraded its forecast for UK growth this year from 4.5% to 5.3% and next year from 5% to 5.1%, representing the UK’s most rapid economic expansion since 1988. Its current forecasts suggest that, having been the worst-performing G7 economy in 2020, the UK is set to be one of the best performers in 2021, beaten only by the US and France.
The Office for National Statistics (ONS) reported a sharp improvement in economic activity during April as non-essential shops reopened. Sales of “delayable goods” such as clothing and furnishings rose above pre-pandemic levels, reaching 110% of their February 2020 level.
Retail sales volumes rose by 5.4% month on month during March, underpinned by strong demand for clothing, which climbed by 17.5% over the month. Supermarket chain Sainsbury’s reported a full-year loss of £261 million, citing the impact of high Covid-related costs, and Tesco reported a fall of 19.7% in full-year pre-tax profits, despite robust sales boosted by a 77% increase in online activity. During April, high-street retailer Next upgraded its profit forecast for the current financial year, buoyed by encouraging online sales. Nevertheless, the company confirmed that ongoing uncertainties meant that its dividend would remain in suspension, to be reviewed later in the year. AB Foods – which owns Primark – reported that the clothing chain enjoyed record sales following the reopening of non-essential shops from 12 April. Although profits fell, AB Foods will pay a dividend of 6.2 pence per share to its shareholders.
Some retailers remain doubtful about the sector’s prospects: Frasers Group – which owns Sports Direct and House of Fraser – remains “almost certain” that further Covid-related restrictions will be imposed in future and warned this could result in asset write-downs of over £200 million.
UK Equity Income Market Review
Companies return value to shareholders
As investors became increasingly sanguine about prospects for the UK economic recovery, share prices generally rose during April and several major companies announced dividend increases and share buybacks.
Over the month, the FTSE 100 Index climbed by 3.8%, while the FTSE 250 Index increased by 4.5%. Since the start of the year, the best-performing FTSE industry sectors include industrial metals & mining and industrial transport, while the worst performers include oil & gas producers and oil equipment. The FTSE 100 Index’s yield fell from 3.31% to 3.08% during April, while the FTSE 250 Index’s yield declined from 1.98% to 1.85%. In comparison, the yield on the benchmark UK gilt remained largely unchanged at 0.84%.
“After the year-long pandemic winter for dividends, the buds of spring are about to burst into bloom”
Following an earlier-than-expected reduction in its net debt levels, oil company BP started its share buyback programme by repurchasing US$500 million-worth of shares. The company had not been expected to begin buybacks until the end of 2021 or the beginning of 2022. BP cut its dividend last year but has kept the payout flat with the intention of returning value to shareholders through buybacks. Elsewhere in the energy sector, Royal Dutch Shell revealed strong first-quarter profits that were boosted by higher oil prices. The company intends to raise its quarterly dividend payment to shareholders by 4% but will not initiate a buyback programme until debt levels have fallen to below US$65 billion. Meanwhile, consumer goods manufacturer Unilever announced better-than-expected first-quarter sales alongside plans for a share buyback of up to €3 million.
Although UK dividends fell during the first quarter of 2021, their decline was the slowest since the onset of the coronavirus pandemic, according to Link Asset Services’ Dividend Monitor. Payouts fell at an annualised rate of 26.7% to £12.7 billion on an underlying basis over the period, dampened by cuts from BT, Compass, AB Foods and EasyJet. Over the past 12 months, dividends dropped by 41.6%. Half of UK companies increased, resumed, or held their dividends steady during the first quarter, compared with one third during the final three months of last year. Looking ahead, Link expects total dividends to grow at an underlying rate of 5.6% during 2021 to reach £66.4 billion, led by the return of payouts from UK banks. Link commented “After the year-long pandemic winter for dividends, the buds of spring are about to burst into bloom”.
US Market Review
Fresh spending plans from President Biden
US share prices rose during April as investor sentiment was boosted by President Joe Biden’s extensive spending plans, the ongoing success of the Covid-19 vaccination programme, and intensifying optimism about US economic prospects. The S&P 500 Index climbed by 5.2% over April and breached 4,000 points for the first time during the month; according to S&P Dow Jones Indices, the S&P 500 Index achieved ten new closing highs during April. Meanwhile, the Nasdaq Index increased by 5.4%, and the Dow Jones Industrial Average Index rose by 2.7%.
“A once-in-a-generation investment in America itself” (President Joe Biden)
The performance of the Dow Jones Industrial Average Index during President Biden’s first 100 days in office was the best since Franklin D Roosevelt’s in 1933, according to a study undertaken by LPL Financial Data. Over President Biden’s first 100 days, the Dow rose by 9.9%, compared with 75.1% for FDR, 9.2% for Lyndon B Johnson, 8% for George HW Bush, and 6.1% for Donald Trump.
Marking his first 100 days in office, President Biden followed his US$1.9 trillion American Rescue Plan with further plans worth around US$4 trillion. “The American Jobs Plan” and “The American Families Plan” will focus on employment, education, social welfare, and climate change, and are to be financed by tax increases on corporate America and the wealthiest individuals. He described the plan as a “once-in-a-generation investment in America itself”; however, there are doubts whether the package will succeed in getting the necessary approval from Congress.
The US economy added 916,000 new jobs during March following February’s revised increase of 468,000 and the rate of unemployment edged down to 6%. Having expanded by 4.3% during the final quarter of 2020, the US economy grew at an annualised rate of 6.4% over the first three months of 2021. Growth was underpinned by strong consumer spending, which fuelled concerns that the economy might be in danger of overheating; these were compounded by a rapid increase in the rate of consumer price inflation from 0.4% in February to 0.6% in March, representing the largest one-month rise since August 2012. Nevertheless, the Federal Reserve (Fed) dismissed the increase as “transitory”. The International Monetary Fund (IMF) expects the US to achieve the strongest growth of all the G7 economies of 6.4% during 2021, compared with its global forecast of 6%.