We expect a good 2021 recovery.

Recent upswings in equity markets have been boosted by news that China posted a record 18.3% growth in economic activity in the year to the end of March, that the US$1,400 stimulus cheque being paid directly to all US adults is now being felt in US retail sales and the US jobless numbers fell to 6%, their lowest level since March 2020. Two leading barometers of economic activity are the prices of copper and oil. Copper prices on the London Metal Exchange are up 18.4% at US$9,382 per tonne so far in 2021 while Brent Crude Oil is up 25.2% at US$65pb.

These factors had a part in propelling the S&P 500 to a record high of 4165 in mid-April. The S&P 500 is now 23% up on its pre pandemic value of February 2020 while the Dow Jones, Germany’s Dax and France’s CAC indexes have all overtaken their pre pandemic values. In the UK it is the domestically focused FTSE 250 that has performed well and closed at record highs recently. This illustrates the general confidence in the central banks and the vaccine roll out but markets are also sensitive to any setback which has resulted in risk on/risk off volatility over recent months.

There has been a noticeable rise in new car sales particularly in Europe. In March 1.3m new cars were registered in Europe alone. Tesla is the leading brand for electrical vehicles (EV) accounting for 16% of global sales, but the traditional car manufactures are now quickly catching up. While only 4% of cars on UK roads are currently electric powered, this will soon change as legislation, incentives and charging infrastructure develop.

The sale of new petrol and diesel cars will be stopped in Britain from 2030 which is only nine years away. It is predicted that by 2030, Volkswagen will be the biggest EV producer. VW already produces as many electric cars as Tesla but has yet to start manufacturing its own batteries. Recently VW has stated that it should be able to reduce the cost of battery units to less than Tesla and move 80% of its vehicle production to EV alone by 2030.

Traditional car brands are catching Tesla up in battery technology with Toyota, VW, Hyundai and Honda making significant progress in solid state, lithium sulphur and lithium oxide batteries. Supporters of Elon Musk point out at Tesla’s ambition to become the biggest car company in the world will support further growth in its share price having already risen by 743% in 2020. Some analysts see Tesla as more of a battery, software and technology company than a car manufacturer.

It comes as no surprise that oil companies such as Shell are diversifying their activities away from oil and investing in hydrogen technology, clean energy sources and carbon capture systems.

Throughout lockdown there has been a general falling in the demand for credit and lending. This is usually a bad sign for banks and the economy in general. Due to lockdown, companies and households have been paying down debts rather than taking on new ones. JP Morgan has reported that its loan book is 44% of its deposits value while last year it was 57%. This indicates that there is significant headroom for new borrowing and banks will be eager to lend.

Economic activity should continue to grow in 2021, particularly in the second half when the roll out of mass vaccinations and the massive fiscal stimulus in the US will come through in corporate earnings. We are aware that there is a sector rotation going in on and that portfolios need to reflect these changes. The sector moves that are relevant are an increased exposure to financials as this is linked to raising yields while the energy and commodity sectors are geared to a cyclical upswing. The demand for industrial metals will improve as government infrastructure and clean energy programmes start to take off.

The continuing opening up of economies has also triggered a style rotation from high growth to traditional value stocks. Sectors like finance, energy and commodities are picking up but technology and high growth stock have recently lagged. This is one reason that the FTSE 100 has improved and is seen as inexpensive relative to other stock markets.

The issue that may knock the global recovery off track is a significant third wave of infections in major economies, the vaccination roll out hindered by supply, vaccine production protectionism, trade tensions between US and China and the early tightening of stimulus as inflation takes off. We are aware that emerging markets could be impacted by China’s tightening and the strengthening of US$ and US bond yields.

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