Stock market recovery 2021: half-term report

Six months into the year, interactive investor’s head of markets compares what we said at the end of 2020 with what has actually happened and where we are now.

In December 2020, after the announcement of a vaccine, but before economies could react to a brighter world, we asked whether 2021 would be the year of recovery from an extraordinary pandemic. 

We suggested that the following could be major themes. Now, having reached the mid-point of 2021, we assess what has happened so far this year.

The themes were:

Release of the UK from the EU
Economic repair
China/US relationship
Online – accelerated structural shifts
Vaccine
ESG
Risks
Year-on-year comparisons

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Release of the UK from the EU

What we said

“The release of the UK from the EU removes a potential obstacle, even if the economic prospects make for ugly reading.

"The dividend story could also be an attraction for investors in the event that we see a return to the previous average yield for the index of between 4% and 4.5%.”

What has happened

The combination of policy support, pent-up demand (and savings) and a successful vaccine programme have all underpinned a growing economic recovery in the UK.

While issues remain, such as the removal of the furlough scheme potentially leading to a spike in unemployment, the UK markets have found favour with international institutional investors on valuation grounds. An additional kicker for the FTSE100 index has come in the form of its cyclical constituents which are set to benefit from a global recovery, such as the oils, miners and banks.

Economic repair

What we said

“With central banks and governments still underpinning markets, to a large extent the roll-out of a pandemic vaccine is the last piece of the jigsaw to economic repair.

"This could have many positive implications, such as for the banks.”

What has happened

Apart from Barclays, the emerging themes from the banks’ latest results was the release of impairments which turbocharged quarterly profits.

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With regard to dividends, there has been a gentle return and, while the levels of previous dividend payments cannot be guaranteed due to government caps, there is nonetheless plenty of room for manoeuvre from a financial perspective.
Economic repair has certainly taken off. In fact, it has taken many investors by surprise, with the strength of the recovery, especially in the US, outstripping current supply (such as raw materials and labour), in turn fuelling inflation and interest rate concerns.

This will remain a central theme of debate for the remainder of the year.

China/US relationship

What we said

“The discord may have levelled off for the moment in the China/US relationship, but the issue has not gone away.”

What has happened

There was certainly optimism that after President Biden took office, there would be a more conciliatory approach to China.
However, since he took office there have been a number of aggressive orders against China, such as the imports of solar panels on human rights grounds, additional companies added to the trade blacklist, and a broad review of technology security to fend off “foreign adversaries”, including China.

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The recent passage of a $250 billion bill to fund the race for technological leadership against China underlines the White House’s determination to keep the pressure on its emerging rival.

Online – accelerated structural shifts

What we said

“As we emerge from the pandemic, it will begin to become evident how much of the enforced change to our behaviour is actually here to stay. It should also prove whether online has seen accelerated structural shifts.
This in turn will inform the progress of many companies.”

What has happened

The easing of restrictions has not yet completely washed through, and differing economies are recovering at differing speeds.
Overseas travel remains complicated and restricted, while the slow return of office work seems likely to result in a “hybrid model”, with a mixture of physical and online presence.

The jury is still out on structural trends and whether the habits picked up during the pandemic will remain but, in any event, it appears to have had the effect of both bringing forward purchases and enlarging tech usage as a whole.

Vaccine

What we said

“The welcome discovery of a vaccine in several countries and the likely acceptance of safety from the relevant regulators provided a boost to sentiment towards the end of this year.

"Focus will shift in early 2021 towards the gap between discovery and distribution of the vaccine on a global scale.”

What has happened

There have been some success stories in the rollout of the vaccine, especially in the UK and, of late, increasingly in the US.
At the same time, there are still pockets of concern in some of the largest continents, and the relative scarcity of vaccines has been exacerbated by some emerging variants.

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Much progress has been made in the first six months of the year, but the issue is far from being put to bed as yet.

ESG

What we said

“2020 has arguably been the year when the term “Environmental, Social and Governance”, or ESG, really became of age. Next year is likely to see ESG  becoming fully entrenched, rather than a separate animal, in investment terms.”

What has happened

According to Morningstar, a  record £248 billion flowed into ESG funds in 2020. 

Despite this growth, the theme continues to evolve, and several factors have yet to be adequately resolved.

These include but are not limited to trade-offs and grey areas (such as oil companies investing heavily in renewable energy, or tobacco companies scoring highly on employee relations and treatment), geographic variation (with no central global parameter) and true transparency.

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Further evolution and clarity is inevitable as the ESG theme continues to grow.

Risks

What we said

“Markets do not move up in a straight line, and investment brings risks by definition. 2021 will be no exception, and investors will need to consider some of the more likely possibilities.

"There is another risk in the form of withdrawing monetary stimulus too soon, or indeed not providing more where required. Economic recovery could be fragile, especially in those sectors most affected by Covid-19, and the balancing act needs to be carefully managed.”

What has happened

The themes mentioned above have indeed been central in the minds of investors, particularly whether the strength of the economic recovery could overshoot and propel us into an inflationary environment.

These will continue to play out over the coming months.

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Year-on-year comparisons

What we said

“Year-on-year comparisons for companies reporting will be interesting to watch. 

"The first quarter of 2020 was partly affected by the pandemic in the month of March, and it is unlikely that companies will have been able to recover by the first quarter of 2021 and comparisons will therefore be less positive.

"With the possibility of a vaccine in place at some point during the second quarter of 2021, and compared to Q2 2020 when the market was taking the brunt of the pandemic pain, this could be a much stronger comparative quarter.”

What has happened

Q1 results were exceptional, with an estimated 90% of US companies comfortably beating expectations. There are equally high hopes for the imminent second quarter/half-year numbers.

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And finally, markets at a glance so far this year: