Looking back on 2020, only four sectors in the Investment Association lost money during the year. They were UK All Companies, UK Equity Income, UK Equity & Bond Income and UK Direct Property. Clearly the UK domestic market was out of favour amongst investors during the year.
The first three months of this year, it was almost a role reversal. The four best performing Investment Association sectors (in order) were IA UK Smaller Companies, IA North American Companies, IA UK Equity Income and IA UK All Companies.
So why could this be? Well there are perhaps several reasons for this. Firstly, 2020 saw the UK finally leave the European Union, despite not all trade deals being finalised, this uncertainty does typically not bode well for markets. There were also concerns about how badly the UK had handled the pandemic, what with a Government that was accused of being too lax and slow to respond and with some grim COVID death statistics. But the perceived under performance of UK stocks was exacerbated as Sterling also fell during the year, which made overseas holdings appear to perform much better (for UK investors anyway).
Fast forward to this year and there has been a change in perceptions. Having been accused of being ‘slow to respond’, the UK Government have been praised for their proactive measures with regards to securing vaccinations and the roll out of the vaccine program. The Government remain on track to reach the self imposed targets and to be one of the first countries to have implemented nationwide vaccination.
Conversely, having had a fantastic 2020, it was technology stocks that fared the worst during the first three months of the year. The beginnings of a rotation out of growth and into value that we first mentioned in the Q1 2021 Portfolio Update appeared to continue during the start of this year. This is perhaps another reason why UK equities have fared better than other markets; the UK stock market index has a far greater weighting to economically sensitive companies than other international stocks markets (in sectors such as Basic Materials, Financials and Energy).
It was a different story for fixed interest markets, as bond yields rose almost across the board. There are perhaps a couple of reasons for this. Firstly, there is buoyed optimism of the global economy recovering at a quicker pace given the success of the vaccine roll out in certain parts of the world (such as the UK and the USA), but also because of the increase in inflation expectations.
If investors expect inflation to rise, then the real value of the future interest paid on a conventional bond will fall. This therefore makes these bonds worth less and leads to the aforementioned rise in bond yields. At the end of 2020, an investor holding a UK Gilt that is due to mature in 10 years was receiving a yield of 0.23%. As at the end of March 2021, this yield has more than quadrupled to 0.93% It was a similar story for US treasuries, where the 10 year yield rose from 0.91% to 1.74%, US treasuries had their worst quarter in performance terms for 30 years.
As always, from all of us here at Montage, stay safe and we will hopefully see you very soon.