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Please see the below article from Invesco:

Key takeaways

What do investors want from cryptos?

Diversification and capital appreciation are two major goals for many crypto investors.

Reward potential is tempered by volatility

Bitcoin has had a meteoric rise, but when prices fall, they have tended to fall hard.

A cautious approach may be warranted

For those who want to invest, I would urge them to consider classic investment tenets such as diversification and regular rebalancing.

It’s about that time again — time to write another blog about cryptocurrencies. Not surprisingly, I received a deluge of client questions on cryptos last week given the Coinbase IPO and the record highs bitcoin reached earlier in the week (followed by the steep pullback in prices over the weekend).

Of course, the most common question I get is, “Should my portfolio have an allocation to bitcoin?” This is not dissimilar to the questions I got back in late 2017 when bitcoin was on a tear and there was a lot of media coverage of it. However, what’s different this time is that not only retail investors are asking me these questions but so are institutional investors.

The critical question about cryptos

When considering the inclusion of any asset class in one’s portfolio, we must ask the simple question: What will this asset bring to the portfolio? For an alternative asset class — investments beyond traditional stocks and bonds — usually the primary goal is diversification.

Historically, bitcoin has had a low correlation with traditional asset classes such as the S&P 500 Index. For example, from Jan. 1, 2011, through March 31, 2021, the correlation between bitcoin and the S&P 500 was 0.15. However, as bitcoin has become increasingly popular, that correlation has increased, hitting a much higher 0.66 for the period of Jan. 1, 2020, through March 31, 2021. This suggests that bitcoin may no longer offer as much in the way of diversification benefits as it previously did. However, that does not mean that other cryptocurrencies will not offer diversification benefits.

Of course, capital appreciation potential can be an important goal as well, and bitcoin has had a meteoric rise from just $314.50 on Jan. 2, 2015, to a new high of more than $64,000 early last week. And bitcoin could potentially move far higher if more retail and institutional investors choose to include it in their portfolios. However, it has also experienced extreme volatility and major drawdowns, as evidenced by the significant drop it experienced last week — after hitting that all-time high, it quickly fell to less than $54,000.

Potential investors need to recognize this risk/reward profile. Since 2011, bitcoin has spent 93.6% of days trading beneath its highs. This compares favorably to gold, which over the same time period spent 98.4% of days trading beneath its highs, and compares unfavourably to the S&P 500 Index, which spent 86.6% of days trading beneath its highs. But importantly, on days when bitcoin was beneath its highs, it was trading on average 53.5% below its highs. By contrast, when gold was trading beneath its highs, it traded on average 25.6% below its highs, and for the S&P 500, that number was 3.8%. In other words, when bitcoin prices fall, they tend to fall hard. Other cryptocurrencies have also had strong price appreciation — and have been similarly volatile with substantial drawdowns. In other words, cryptocurrencies have historically offered significant reward and significant risk.

Other reasons for wanting to own alternative asset classes may include the ability to hedge inflation and the ability to hedge geopolitical risk. For example, some investors add gold to their portfolios in an attempt to hedge inflation, even though historically gold has only sometimes been an effective hedge against inflation. Because cryptocurrencies are relatively new, there is no long track record we can examine to determine whether any have historically offered these properties. It will remain to be seen if cryptocurrencies can provide hedges for such risks.

Four additional crypto considerations

Just a few other considerations investors should be aware of:

• Regulation. First of all, there is the potential for regulation of cryptocurrencies. Now that is not necessarily a bad thing. For example, regulation could increase confidence in investing in cryptocurrencies. However, it could also mean additional costs, which could depress the prices of cryptocurrencies. Moreover, extreme regulation could result in the shuttering of local crypto exchanges and a ban on the use of cryptocurrencies.
• The environment. Bitcoin is not the most environmentally friendly investment. Bitcoin averages around seven transactions per second, and each one requires a substantial amount of electricity: 951 KWh per transaction.3 I could envision some institutional investors coming under pressure from groups demanding divestment of environmentally unfriendly investments such as bitcoin. The good news is that other major cryptocurrencies use far less electricity.
• Competition. Other than being the first successful cryptocurrency and a pioneering invention coinciding with the birth of blockchain, there is not much that makes bitcoin special. Other cryptocurrencies share some similarities with bitcoin, and it may very well be possible that as bitcoin approaches its terminal supply amount, another cryptocurrency that is more technologically advanced and efficient takes its place. This perspective complicates the exercise of asserting a long-term value to bitcoin.
• Liquidity. Investors can be overwhelmed by the number of cryptocurrencies out there — it can be difficult choosing which ones to invest in. I suggest focusing on the largest cryptocurrencies given they are the most liquid: in addition to bitcoin, that includes ethereum, ripple, litecoin and perhaps a few others. However, investors should research the different attributes of each of these cryptocurrencies.

So, should bitcoin be in a portfolio?

And so for every client who asks me whether they should add bitcoin to their portfolio, I respond “it depends.” It depends on risk tolerance, investment goals and other factors. For those who believe cryptocurrencies are suitable for investment, I would urge them to consider a small allocation and to perhaps diversify among a number of major cryptocurrencies, since each has different characteristics. And I would favor diversification with other alternative asset classes such as gold and real estate. Regular rebalancing may also help investors to methodically take profits on upward price movements, and to take advantage of price swings lower, and active management should help as various cryptocurrencies rise and fall in investor popularity.

Cryptocurrencies seem to always be in the headlines, whether it’s Bitcoin’s meteoric rise or its rapid falls.

This article from Invesco is more about using Bitcoin as a diversifier than a direct investment and its important to note that Bitcoin and other cryptocurrencies are still more of a gamble than an investment.

Andrew Lloyd

22/04/2021

Please see article below from Legal & General’s Asset Allocation team received yesterday afternoon – 19/04/2021

Our Asset Allocation team’s key beliefs

Questions of geography

We will address just two topics this week. First, looking at the global numbers, the pandemic is once again intensifying with cases and deaths sadly reaccelerating. But have markets become immune to bad news on the virus? Second, bond yields fell last week despite inflation and growth both surprising on the upside. We think a small island chain in the Caribbean holds a clue to the newfound resilience of the Treasury market.

Is the COVID-19 threat receding? It depends where you live

Looking at recent economic data, it is easy to conclude that the COVID-19 crisis is fast receding in the rear-view mirror. Last week, we learned that China’s GDP grew by 18% year-on-year in the first quarter and that US retail sales jumped by an extraordinary 28% year-on-year in March. Such annual comparisons are flattered by the base effects from the collapse in activity this time last year, but the sense of economic renaissance is palpable.

In the OECD, vaccination programmes have started to bear fruit. Even the EU, which has been infuriatingly slow to roll out its vaccine programme, is now getting its act together and vaccinating at roughly at the pace of the US in mid-February. The EU is on track to hit its target to inoculate 70% of the adult population by September. The main change is in Germany, where the country’s 35,000 GP practices are now permitted to administer shots, rather than just 430 centralised vaccination hubs. A little decentralisation goes a long way.

At the global level, however, there is sadly little sign of the pandemic slowing down. The virus is still raging in emerging markets, with Brazil and India suffering from their darkest days since the crisis began. Headlines of 150 million cases worldwide are likely only a few weeks away.

Does this matter for global markets? At the aggregate level, we think the answer is no. We’ve stuck to a positive medium-term outlook on equities despite these virus dynamics. It’s always important to remember that markets are a discounting mechanism. Notwithstanding the staggering death toll from COVID-19 (nearly three million and counting), investors are collectively capable of looking through today’s ongoing pandemic to the prospect of normalisation tomorrow.

Caribbean clue to the CPI conundrum

On top of the strong growth numbers mentioned above, US inflation rose by more than economists’ consensus expectations in March. Core CPI rose by 0.34% month-on-month (versus the expected +0.2%) and 1.65% year-on-year (versus the expected +1.5%). Several of the beaten-up components climbed slightly on the month, but still remain depressed with scope to rise significantly over the next few months as the economy opens.

In the coming months, we expect core inflation (on both CPI and PCE) to peak around 2.5% year-on-year. There are strong base effects which we believe make a rise above 2% inevitable. In addition, there are reopening effects with some prices normalising and supply-chain disruptions boosting components such as used-car prices. Finally, demand-pull inflation from stimulus spending could add to upward inflation pressure. It is plausible that core inflation could even reach 3%.

Despite that upside news, and the prospect for stronger inflation ahead, Treasury yields have fallen over the course of the past couple of weeks. One explanation comes from Treasury International Capital System data released last week, which revealed that investors domiciled in the Cayman Islands have made net sales of $400 billion of US Treasuries in the 12 months through to February. Not bad for a small island chain with a population of 70,000!

What’s going on here, and why is it relevant? It is estimated that over 80% of the world’s hedge funds are registered in the Cayman Islands and the size of the net sale suggests that a sizeable short base has built up in what is euphemistically referred to as the “fast-money community”.

The message on positioning from these data are matched by a similar story from the options market and surveys of investor sentiment. Having worried about COVID-19 for 12 months, institutional fund managers now say they worry most about inflation and a bond-market tantrum.

Yet in the words of General George S. Patton, “If everyone is thinking alike, then somebody isn’t thinking.” Consensus bets can sometimes pay off, but they are vulnerable to small changes in sentiment having an outsized impact. The size of the short base is now such that the reflationary narrative needs to be constantly buttressed by new information to keep yields moving up.

The bar for taking short duration positions just got that little bit higher.

Please continue to check back for our latest blog posts and market updates.

Charlotte Ennis

20/04/2021

Please see below an article published by Money Marketing today, which was written by Rachel Vahey, a Senior Technical Consultant from AJ Bell. This article highlights some of the key considerations of the proposed changes to the Normal Minimum Pension Age moving from age 55 to age 57:

I think the above article helps highlight some of the key factors that will need to be factored in when considering possible pension consolidation exercises or general pension switches. It could be that to switch your pension to a new provider in the future could mean you losing a minimum pension age of 55 under the existing contract and instead not being able to access your pension benefits until age 57.

There are a few questions clients will have to consider with their I.F.A., which are:

• When do I realistically anticipate drawing pension benefits?
• How do I want to draw benefits from my pension? and
• Does this change (in minimum pension age) really impact on my plans?.

The reality is that you need a lot of capital to retire early and for the majority of people it’s not an option.

Another key issue that needs to be considered is that some old-style legacy pensions cannot facilitate Flexible Access to pension funds and instead force you to either purchase an Annuity or encash the pension. 

All of the above really need to be weighed up very carefully before making any decision and taking financial advice will help you consider your own situation.   

It remains to be seen how the government will implement the proposed changes and what the potential fallout could be, but we will keep you fully updated with any changes that are announced.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

19/04/2021

Please see article below from Quilter Investors received yesterday afternoon – 15/04/2021

The need to diversify

Quilter Investors chief investment officer, Bambos Hambi, explains why private investors need to diversify across different asset classes and different geographies.

Over the last 30 years or more, while the ‘average’ retail investor (if there is such a thing) has undoubtedly become more investment savvy, investment markets and the fund strategies that draw upon them have taken a quantum leap in both size and sophistication. Consequently, the chasm between the two has probably never been greater.

Even today, too few private investors really understand the need to diversify their savings across different asset classes and geographies and how this impacts the risks to which their financial futures are subject.

Given the constant media barrage, it’s hardly surprising that investor ‘champions’ such as the ‘FAANG’ stocks – namely Facebook, Apple, Amazon, Netflix and Google (Alphabet) – arise. A previous investor acronym that once attracted similar attention is the ‘BRICS’, which stood for Brazil, Russia, India, China and South Africa.

While both helped attract huge levels of new investment, anyone who plumped solely for these investment areas will have experienced a bumpy ride. By contrast, the essence of diversifying across a range of different risk categories is that it smooths the investment journey, enabling us to make more reliable plans for our financial futures.

Spinning the wheel

Many people still think of diversification in terms of eggs and baskets, but it’s a flawed analogy. In reality, the risk of concentrating your savings into a few leading tech stocks, or a group of ‘hot’ emerging markets, is much more akin to walking into a casino, putting your ‘egg’ on one number and spinning the roulette wheel.

A better analogy is to think of diversification in terms of cooking. Imagine an array of different pots bubbling away. While each one will come to the boil at different points, delivering the desired outcome, each could also boil over, or just go cold, if left unattended.

This is where a multi-asset portfolio manager comes into play. It’s their job to stir each ‘pot’ and see that it receives the right amount of heat, at the right time, to achieve the desired end result.

Over the last 30 years or more, investment markets and fund strategies have taken a quantum leap in both size and sophistication.

Active not reactive

Having a fully resourced portfolio manager at the helm is important because, as the table (see the pdf at the bottom of this page) shows, different asset classes and regions respond to economic events in different ways. Accounting for this requires constant monitoring, analysis and position refinements at the portfolio level.

Take UK property as an example. In terms of investment returns for the 11 asset classes listed in the table, UK property had yo-yoed from last place in 2016, to first place in 2018 and back to last again by 2019.

Meanwhile, UK equities, which have never placed higher than fifth in the last 10 calendar years, proved to be the worst performing asset class of 2020, thanks to the onset of the pandemic and the last thrashes of the Brexit farrago.

By contrast, the pandemic, and the speed with which China was able to deal with its fallout, helped to propel Chinese equities into first place in 2020. They were also the best performing asset class in 2017 (but the worst in 2018).

Creating solutions

Thanks to our scale and reach as an investment business, we begin with a universe of many thousands of different strategies and fund structures and whittle it down to find the ‘best of breed’ in each space.

This means our portfolio managers and investment teams spend the majority of their time researching, analysing and modelling to find those managers who can demonstrate the most consistent returns for the level of risk with which we’ve entrusted them.

As dedicated portfolio managers, we have two key advantages over investors who decide to manage their own investments. The first is the time, expertise and expense required to actively monitor global markets, to decide which asset classes are best suited to the conditions and to identify those managers that consistently do the best job in each asset class.

The other great advantage we have is access. Unlike private investors, we have access to a huge swathe of investment managers and strategies from around the world covering every major equity and bond market. Often we invite proven managers to create dedicated funds (called mandates) that are run especially for us.

We also have access to a whole universe of fund strategies that either aren’t available to UK investors, are too sophisticated for private investors or which require minimum levels of investment that put them far beyond the reach of ordinary investors. This is especially so in the case of so-called ‘alternative investments’.

Alternative thinking…

The term ‘alternative investments’ covers an enormous global investment industry that’s all but closed to private investors. Alternative investment funds cover the widest range of asset classes from commodities like gold and oil to other ‘real assets’ such as commercial property, infrastructure and renewable energy.

They also include hedge funds that invest in all manner of asset classes but which, thanks to the complex derivative strategies they employ, can pursue all manner of different instruments. Many of these focus on generating returns that have a low ‘correlation’ to those of equity or bond markets, others focus on delivering consistent ‘absolute returns’ whatever the investment environment.

Having access to such diversity allows us to reduce the correlation of our holdings both with one another and with major global equity and bond markets. This means that if, say, a global pandemic broke out and sent equity markets into steep decline, as was the case in 2020, other holdings, not correlated to equity markets, could take up the strain.

Unlike private investors, we have access to a huge swathe of investment managers and strategies from around the world covering every major equity and bond market.

Diverse times

Recent months have provided ample illustration of the need to properly diversify portfolios.

The unprecedented events of 2020 ended with one of the greatest relief rallies on record, thanks to news of three viable coronavirus vaccines. Within this, ‘value stocks’ that had been in the shadow of ‘growth stocks’ for almost a decade began to outperform as investors rotated into those areas previously left behind (see the inset box).

Only weeks later, the headlines were dominated by news of rocketing government bond yields and major losses for bond investors as markets began to price-in ‘reflation’ – the period of rising prices and growth that tends to follow a period of ‘deflation’ (falling prices and growth), like the one caused by lockdown.

On the whole, reflation is a welcome sign for long-term investors like us, as it shows that an economic recovery is well underway and that improving economic growth lies ahead. However, bond markets naturally recoil at the prospect of the higher inflation and interest rates that might accompany it.

Not only did lower-risk bond investors feel this in the pocket, but investors at the other end of the risk spectrum, namely, higherrisk ‘growth investors’ in equities, also suffered. The so-called FAANGs and other leading tech companies were among the early casualties.

This is because growth stocks tend to struggle with the risk of higher interest rates and inflation; as a high level of their predicted profits lies in the future, the prospect of higher interest rates reduces their value today.

While all this was going on, smaller companies began to outperform as they tend to enjoy reflation.

These issues (and too many more to mention) have already exposed investors with too little diversification to significant volatility and potential losses so far in 2021. .

This underlines the ‘smoothing’ benefits of a well-diversified, global portfolio. When changes in the economic cycle or the broader tapestry of society take hold, the diversified investor doesn’t need to ‘run out’ and find a solution because it’s already simmering away somewhere in their portfolio.

Understanding ‘value’ and ‘growth’

In general terms, ‘value’ investment approaches target those companies regarded as looking cheap relative to the value of their assets (also known as their ‘intrinsic’ or ‘book’ value). Value stocks tend to be well-established businesses, which often offer high levels of dividend.

Good examples of value stocks include banks, oil and mining, utility and industrial companies although any company whose valuation is below the market average is technically regarded as a ‘value stock’.

Meanwhile, ‘growth investing’ is more focused on capital growth than on collecting dividends. Growth stocks tend to be younger or smaller companies whose earnings are expected to increase faster than those of other companies in their industry sector or the broader market.

They tend to pay limited dividends as they are busy reinvesting their profits in growing their businesses.

Growth stocks are most commonly found in the technology sector with companies like the ‘FAANGs’ the most prominent example of recent years.

Other ‘cyclical’ areas (meaning companies most impacted by the economic cycle) such as consumer goods, leisure and travel or the automobile sector often contain ‘growth’ stocks. The same is true of areas like biotech.

Ultimately, any company with a disruptive business model, ground breaking new technology or an irresistible new line of consumer goods can find itself classified as a ‘growth’ stock if its earnings growth starts to outpace the broader market.

As companies mature and become more established in their industry niche, they naturally evolve from being growth companies into being value companies. That is, until they bring something new to the market, at which point the cycle can begin all over again.

Interesting input from the CIO at Quilters.  A lot of this is what we discuss daily with our clients.  We need diversification by assets, geography, and styles.  Good strong ‘Active’ and ‘Tactical’ fund management helps too, particularly in volatile markets.

As IFAs we use a wide range of investment options for our clients to meet their objectives and risk profiles.  We have a myriad of choice.

Please continue to check back for our latest blog posts and market updates.

Charlotte Ennis

16/04/2021

Please see below this week’s Markets in a Minute update from Brewin Dolphin – received late yesterday afternoon – 13/04/2021

Equities hit new highs on hopes of sustained economic recovery

Numerous share markets hit all-time highs last week, with the S&P500 bursting further past the 4,000 mark, finishing the week comfortably in record territory at 4,129. European markets also performed strongly, as investors bet on continental economies reopening later this year despite problems with the vaccination programme. The European Stoxx600 hit a record high of 437.23 on Friday.

In the UK, confidence in the continued easing of restrictions helped the FTSE100 rally by more than 2.6%, to levels not seen since before the pandemic. Meanwhile, the more domestically focused FTSE250 surged through its previous record of 22,000.

The tech-heavy Nasdaq also recouped some of its recent losses last week, rising more than 3%, helped by a pause in rebounding bond yields. Asia was more subdued, however. Chinese policymakers are reportedly considering tightening monetary and fiscal policy to prevent the economy overheating and inflation rising too high, leading to a pullback in share prices.

Last week’s market performance*

• FTSE 100: +2.64%
• Dow Jones +1.95%
• S&P 500: +2.70%
• Nasdaq: +3.11%
• Dax: +0.84%
• Hang Seng: -0.82%
• Shanghai Composite: -0.45%
• Nikkei: +1.29%

*Data from close of business on Thursday 1st April to close of business Friday 9th April.

Shares start week on cautious note

Markets edged back from their record highs on Monday, as investors digested last week’s surge in equity markets, and looked ahead to key US inflation data out later today. It is the start of first-quarter earnings season in the US this week.

In the UK, the FTSE100 closed down 0.39% at 6,889, despite the feelgood factor accompanying the reopening of non-essential shops and pubs.

In the US, the Dow fell 0.16% at 33,745.40, while the S&P500 fell slightly, losing 0.02% to close at 4,127.99 and snapping a three-week winning run in the process. The Nasdaq fell by 0.36%. In Europe, the Stoxx600 index dropped by 0.25%, although markets in France and Germany edged up.

Bond yields take a breather

The yield on 10yr US treasuries started the year below 1%, but surged in the first quarter to hit 1.67%. Rising treasury yields are usually a sign of increasing investor confidence since yields move inversely to bond prices. When investors sell bonds and invest more of their portfolios in risk assets such as equities, yields rise.

However, there can come a point at which higher yields can tempt investors back into bonds to enjoy a risk-free return on their money, or to search for sectors with more upside potential, especially if yields rise too fast.

Hence, we have seen a large-scale rotation out of growth stocks and into more value-orientated, cyclical sectors during the first quarter, as evidenced by the recent correction in big tech in the US.

The pause in rising yields last week was a key factor in the strong performance in share markets over the past few days, particularly on the Nasdaq.

While yields will likely continue to rise, with 10yr treasury yields expected to hit 2% by the end of 2021, the increase is expected to be more gradual, which equity markets should find easier to digest.

US 10yr Treasury yield

Source: Refinitiv Datastream

Global growth set for record year

The International Monetary Fund (IMF) said last week that it expects the global economy to grow by 6% this year, up from the 5.5% it forecast in January.

If true it will be the fastest expansion on records going back to 1980, despite large parts of the world still being mired in the pandemic.

Also supporting the bullish outlook are the trillions in excess savings waiting to be spent around the world, an improving employment picture in the US, and the Federal Reserve’s insistence that it will not be rushed into raising rates until there is solid evidence of a sustained recovery. Minutes from the last Federal Reserve meeting suggest that there is no intention to raise interest rates until at least 2024, and even then would require firm evidence of a sustained economic recovery and inflation at or above its 2% target.

All this should support further growth in equities as long as we don’t get a nasty overshoot in inflation, and bond yields remain relatively stable.

UK economic recovery appears on track

Last week we saw a slew of positive economic data that suggests the UK economy is enjoying a healthy rebound. The ISM/Markit Purchasing Managers’ Index for the key UK services sector, which accounts for around 80% of GDP, showed business levels improving for the first time since last October, with 56.3% of respondents reporting higher business volumes in March than in February. The UK construction industry is also recovering strongly, with the construction activity index hitting a reading of 61.7, its highest level in seven years.

Another quick update from Brewin Dolphin, these updates are a good way of keeping up to speed with developments in the markets.

Please continue to check back for our latest blog posts and market updates.

Charlotte Ennis

14/04/2021

Please see the below article from Legal and General’s Asset Allocation team received late yesterday afternoon:

With some of the lockdown rules easing in England today, and following some recent warm and sunny weather, it feels like change is in the air. In this week’s Key Beliefs, we look at three areas of the market where change may also be on the way.

A deluge of EU doses?

We try not to talk too much about the vaccines and virus now, as it’s increasingly important we focus on other factors. That said, vaccines have featured more heavily in our recent debates and in the market’s commentary.

In the UK, about 60% of adults have had their first jab. In the US, it’s nearly 50% and 25% of adults are fully vaccinated. While there are still risks to reopening in both cases, the likelihood is that the vaccinations will win out in the race against another viral wave.

Inevitably then, there’s a lot of attention on the European Union, where only about 25% of adults have received their initial vaccine dose. It was inevitable that the more infectious variant that was first identified in the UK would become the dominant strain across the continent, and unfortunately that’s led to further lockdowns, so the question is when Europe will be able to reopen.

The good news is that despite the disappointing progress so far, the EU is poised to accelerate rapidly and will likely be two months or fewer behind on its journey. Alongside some more surprising stories, like Bavaria buying the Sputnik V vaccine, the past fortnight has brought the highest vaccination rates yet at 1.5-2% a week. Germany has now outlined its potential to vaccinate 12.5% of its population a week once the supplies are available; Martin Dietz estimates German deliveries at 16.6 million doses in April across four different vaccine providers.

To catch the US up over two months, the EU would need to vaccinate about 4.5% of the population a week. Given the diversified sources of supply Europe is employing, that looks very achievable. So, on balance, Europe could be another source of positive surprises this quarter. We believe this is supportive of both our travel and leisure equity position and broader positive equity view.

High and dry

Market activity tends to be low in the week following Easter, and similarly there was just one view change from our team last week. That came in US Treasuries, where we removed the tactical short position that was designed to help protect us from the risk of a bumper employment number on Good Friday.

After nearly a million US jobs were added in March, we expect further good news as the country reopens. While that supports our medium-term positive equity view, we’re not convinced it implies higher bond yields. There are two main reasons why.

First, with a 10-year yield around 1.65%, we think valuations are towards the upper end of a fair range and that markets will struggle to price in a much higher path, with almost four rate hikes implied in the market consensus by the end of 2023.

Second, we know being short US Treasuries is a very popular position; we try to avoid such crowds, so we prefer to keep our powder dry.

The biggest risk to yields in the coming months may be the upcoming inflation numbers. Starting from depressed levels this time last year, economists already expect temporarily high prints in the second quarter.

However, with so many unusual factors – including the large build-up of household savings – there is a chance that there are big surprises. Last week, we saw the Producer Price Index rise 1% against a consensus expectation of 0.5%. While it’s a noisy series, it could be the first of many.

That said, for the longer term we don’t buy into the idea that there’ll be sustained inflation and are prepared to look through the short-term noise.

The calm after the storm

Uncertainty is high this year, which makes our mantra of ‘prepare, don’t predict’ all the more important. To take one example, sentiment towards equities has been positive for most of the year, but not stretched to levels where it becomes a worrying sign.

However, one of the indicators that Lars Kreckel finds most reliable, the AAII Bull-Bear Spread, has now jumped to 36.5 and is close to the 40+ level that he considers a warning signal. The most recent Goldman Sachs QuickPoll suggests sentiment is a lot less elevated, though.

Against the improving backdrop, we’ve also seen implied volatility in equities drop markedly over the past couple of weeks, with the VIX at its lowest level since February 2020 and broadly in line with average levels from 2018-2019.

So with some evidence that investors are becoming more bullish, we retain our positive equity view, although following strong performance we rebalance to avoid weights drifting up further. Some portfolios have also been selling volatility at elevated levels as a source of return, but we expect those opportunities will be increasingly hard to find.

Please keep checking back for our regularly updated blog content covering a range of market updates and insights from a number of great fund managers, as well as topical issues such as ESG and our own thoughts and input.

Andrew Lloyd

13/04/2021