The anniversary of lockdown is a sobering moment. Yet it’s also hard to believe that a year has passed since the Covid-inspired low in stock markets. The 23rd March 2020 was the day after a momentous Fed meeting and the day before the equity market began its recovery. And what a recovery…since this time last year equity market performance has been exceptional. With growth of 60.4% in world equities (in euro terms) since the low , investors have seen a 12 month period that ranks as the strongest of the past half century, ahead of the returns from the Great Financial crisis recovery period.
Table 1: Global equity market returns over rolling 1 year periods since 1971 (in US$)
Source: Bloomberg Finance LP 24/3/2021
The US market managed to do a bit better – +77.8% performance, one of only 5 times in history that it has rallied by more than 50% and adding (partly back) a stunning $15 trillion in value to shareholders . A reminder, if ever there needed to be one, as to why investors need to sit out the tough times.
Amongst the reasons to continue using equities as a significant part of an investment portfolio is what has become known as the ‘TINA’ explanation. (“There is no alternative”).
We can see this when we look to the fixed income market and the experience that investors have had in recent months from the lower risk part of the world’s markets. The below shows that investors in long dated US government bonds have experienced a period involving losses of c.19% since last August , making it one of worst period for holding such bonds. Losses across shorter dated bonds and other markets have been less dramatic but nonetheless fixed income investors have been seeing one of the worst periods in recent decades. Simply put, low-risk assets have become very expensive and the prospects for the coming decade are for very low returns as a consequence.
Table 2: US long bond index since 1980
Source: Bloomberg Finance LP
We’ve also just recently had yet another statement from the US Federal Reserve that history may consider to be an important milestone in the direction that markets may take. Coming only a short time after President Biden secured the first $1.9 trillion leg of his fiscal plans (with a further $3bn yet to come potentially), the US policy landscape has been radically changed. The US is setting out on a fiscal expansion of unprecedented scale and monetary policy is remaining supportive. As a consequence markets have begun to shift attention from Covid-19 towards the consequence of higher than expected growth in the recovery – namely inflation. And with increasing inflation expectations, so too come interest rate increases – at least that’s the normal pattern. Some argue that we are in the foothills of a significant and permanent increase in inflation – akin to what began in the mid 1960’s. Others, the US Fed included, believe it will be a short term ‘transitory’ phenomenon expecting to see a spike in inflation followed by its return to low level background noise in the financial system. This tension between what central banks are saying and the market things will be a very significant focus for investors for the coming months – and its resolution will have a significant effect on investment outcomes in the coming decade.
Trends for the year ahead and beyond
Set against the current focus that the market has on recovery and the potential for inflation, however transitory, there are five trends which we highlighted at the start of 2021 which are continuing to play out, each one of which will have an impact for investors.
From virus to vaccination
At time of writing, 125.6 million people have suffered from Covid-19 around the world and 2.7 million have died . At this stage, 4 months after the November announcements, over half a billion doses of the various vaccines have been administered around the world, at a rate of 12.2 million a day according to latest data . Vaccine roll-out in the developed world has dramatically outpaced the developing world, led in particular amongst large economies by the US and UK who have at this stage reached 39 and 46 doses per 100 people respectively. EU numbers including Ireland remain someway behind this at typically 13 -14 doses per 100 people . However with further acceleration anticipated it is to be expected that there is very clear light at the end of the tunnel. For investors, the remaining uncertainty about the timelines has become a lesser concern even if there remains a long journey ahead. Rather the worry remains that developing economies need to be made safe also, as further variants will emerge as we have seen most recently in India.
From lockdown to living life again
So if the vaccination battle is being slowly won, and we are seeing some economies begin to open, Europe in particular remains mired in lockdowns. Numerous EU governments have been forced to once again tighten restrictions which is likely to cause growth to once again slow across the continent for the first half of the year. However life is returning to normal in other major economies. China is amongst the most advanced with growth expectations of 8.5%  for this year. Smaller economies (eg. Israel) where vaccination levels have reached much greater penetration are also seeing the beginnings of normalisation.
From recession to mini-boom
Forward looking estimates for most parts of the world have begun to look more optimistic. The US Federal Reserve in its most recent statement has upgraded its growth expectations for the US to 6.25% for the full year and this has been supported by every strengthening forward looking survey data such as the Purchasing managers indices which are reaching multi-year highs.
From rally to rotation
Last year’s rally was dominated by the industries that fared best from the so called ‘Stay at home trade’ – the IT sector and related industries that benefitted from how we all had to live in 2020 and into 2021. Since the vaccination announcements that has changed with a rotation towards the industries that stand to recover most from normalisation, especially financials and energy related companies.
From monetary to fiscal
The year ahead will be remembered for the beginnings of fiscal largesse, especially in the US, on a scale not seen. With $1.9 trillion already agreed and a potential for a further $3 trillion en route, and a €1.8 trillion package expected on this side of the Atlantic, political commitment to spending our way out of the post pandemic period seems unwavering.
The big gains are certainly behind us with a record breaking year that will be talked about for many reasons in the history books. However it remains hard to argue against further – albeit more modest gains for the year ahead.
Author: Kevin Quinn, Chief Investment Strategist, Bank of Ireland. To find out more contact your financial adviser.
 Measured by the MSCI World index in euros from 23 March 2020 to 23 March 2021. Source: Bloomberg Finance LP
 Measured by S&P500 Total return index from 23 March 2020 to 23 March 2021. Source: Bloomberg Finance LP
 Measured by US long bond index from 4/8/2020 to 23/3/2021. Source: Bloomberg Finance LP
 Source: www.worldometer.com 25/3/2021
 Source: Bloomberg Covid vaccine tracker 25/3/2021
 Source: www.ourworldindata.org 25/3/2021
 Source: Bloomberg 25/3/2021