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WeekWatch -‘the International Monetary Fund said it thinks there will be little long-term economic damage from COVID-19’ April 2021

WeekWatch -‘the International Monetary Fund said it thinks there will be little long-term economic damage from COVID-19’ April 2021

As the UK enters the next phase of its lockdown easing today, it does so against the backdrop of a strong week for its FTSE 100 index of large public companies. As shops, gyms, and pub gardens re-open after a long hiatus, markets appear to be expecting the renewal of activity to help spur the economic recovery. For many people, the chance to go about their lives in a more normal way again will be a poignant moment.

US equities also enjoyed a good week, in what may be a sign of investor confidence in the country’s economic recovery. However, it was also a strong week for the European market, despite the fact that Europe is further behind with its vaccination programme. In fact, European stocks hit a record last week, with the Stoxx Europe 600 index reversing the losses that is has endured during the pandemic.

Last week, the International Monetary Fund said it thinks there will be little long-term economic damage from COVID-19, at least in advanced economies. Accepting that there will be a divergence in the future, it said it expects at least two years of fast growth – with the world economy growing by 6% in 2021 and 4.4% in 2022. Amid the discussions of the world’s recovery last week, the Federal Reserve (the US central bank) released the minutes of its March meeting at which it discussed the outlook for the US market. Most of the participants thought that the risk of unexpectedly high inflation was roughly the same as the risk of more subdued levels, creating a ‘broadly balanced’ outlook according to the release.

“It may be necessary to await data a little later in the quarter before the inflation dynamic becomes somewhat clearer,” wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund. He and his team are searching the data for evidence about its direction, he added.

Since vaccine programmes began last year, markets have been weighing up whether a rapid economic recovery could bring about a phase of higher inflation. If it grows too high, it might eventually cause governments and central banks to change their policies in response. These policies (such as low interest rates) have supported asset prices since the pandemic took hold last year.

There is a concern in some corners of the market that higher interest rates could be a challenge to the share prices of the companies that have seen their valuations soar over the past 12 months. Some large technology companies, for example, are trading at high valuations relative to their earnings.

This underlines the importance of maintaining a diversified portfolio of investments, wrote Ugo Montrucchio of Schroders, managers of the St. James’s Place Managed Growth fund. He suggests that talk of a ‘bubble’ in technology stocks is probably less relevant to the largest companies companies, which have a history of strong earnings, but could be relevant to ‘second tier’ technology stocks whose revenue projections are overambitious.

“A way to navigate through what may well turn out to be a bubble is to diversify your exposure and cast your investing net as wide as possible,” he added.

Looking ahead this week, investors will be scouring for clues about the health of public companies in their upcoming results releases. So-called ‘earnings season’ is a chance for companies to disclose details about their operations, and an important time for investors trying to assess their prospects.

In the US, many investors will be watching reports come in this week from large companies such as banks and airlines. Many companies will naturally report higher earnings over the last three months than during the first quarter of 2020 (which they are compared to). But perhaps more pertinently, they will include information about the extent of the damage caused by COVID-19, or by the computer chip shortages that have recently been causing headaches for manufacturers and technology companies. Surprising results in either direction can be expected to move markets this week and beyond.

BlueBay, and Schroders are fund managers for St. James’s Place.

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