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As we all know, the backdrop in the UK and US is certainly improving thanks to a successful vaccination programme. In the UK’s case, it has seen nearly all those individuals most at risk have now received their first vaccination and on course to have the entire adult population vaccinated by July. The UK vaccination programme has been a huge success and means that as we are writing this the UK is gradually emerging from restrictions that have been with us now for over a year. The same currently cannot be said about other countries vaccination rollout and in particular, the EU.

Fixed Income
It has been a very challenging quarter to be invested in government bonds during 2021 so far. All major government bond prices fell in value and their yield subsequently increased. It is important to put this into context though – 2020 was a strong year for
government bonds because the fear caused by Covid-19 in 2020 pushed investors and central banks to buy more and more safe-haven assets (such as government bonds), which meant that at the end of 2020 bond prices were at highs and bond yields were the lowest they have ever been.

The two regions with the best vaccine roll-out, the UK and US, have been the worst impacted markets as investors can see their economies reopening and with-it higher
levels of inflation.

As bond prices fell and yields rose those fixed income securities with a higher duration were most impacted – these bonds are more sensitive to changes in price.

Elsewhere in fixed income, it has been a challenging period for most other fixed income asset classes with bonds falling in value. The exception was high yield where it has
shorter duration which means they are less sensitive to increases in bond yields. Credit spreads (the additional risk for buying a high yield corporate bond over a government bond) tightened during the quarter – this helped offset the negative impact from rising government bond yields.

Global Equity Markets
It has been mostly a good period to be an equity investor during 2021 so far. Stock markets have moved in anticipation of economies gradually reopening and continue to head in positive territory. Interestingly the UK and US have been two of the better performing global stock markets over the period perhaps because of a combination of their economies reopening quicker and some of the Brexit discount is unwinding for UK assets.

The UK FTSE 250 has also started the year very strongly. Whereas after a strong 2020 the Japanese Nikkei 225 retreated in value.

The Technology orientated Nasdaq index had a particularly strong 2020 and started 2021 strongly but came under pressure as investors took profits on those stocks that have done so well and started to rotate back to companies that can perform as global economies reopen, “the recovery trade”.

It has been a strong period for Private Equity over the last 3 months with a number of the listed Investment Trusts going through a period of realisations, i.e. companies have been going from the private to listed markets via IPO and in doing so seeing an uplift in valuations. It has been a more challenging period for Infrastructure assets – these tend to have bond-like characteristics in that they pay high yields. In a falling bond price and rising yield backdrop these securities struggled and posted negative returns.

Safe haven commodities like Gold and Silver fell during the first quarter as investors felt optimistic about the economic environment. Whereas industrial and energy-oriented commodities benefitted from the economic recovery – the Oil price was hitting headlines a year ago because of its low price and was even negative for West Texas Crude Oil. The Brent crude oil closed the first quarter at $62 a barrel.

In summary, it has been a period for risk takers; safe-haven assets whether that be commodities (gold, silver) or global government bonds faced headwinds as investors grew increasingly confident about the economic recovery in the quarter. This was a positive backdrop for equity markets, which saw a rotation during the quarter – those sectors which have been most impacted during 2020 continued their recovery from November (Financials, Oil & Gas, Travel & Leisure). Whereas, the “loved” areas of the market; high growth and Technology sectors came under pressure as the quarter came to a close.

Looking forward, we continue to be optimistic about the economic and investment outlook. We view the global economy like a “coiled spring”, with the expectation that the easing of restrictions could lead it to burst into life. As and when this happens, it will likely lead to a boom in economic growth. This will be a positive backdrop for equity investors due to their increased sensitivity to the economy.

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