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WeekWatch – ‘US and world stocks hit new highs’ February 2021

WeekWatch – ‘US and world stocks hit new highs’ February 2021

US and world stocks hit new highs at various points last week as investor optimism carried markets through another week of gains.

Hopes are growing that the world will enjoy a strong economic recovery this year. President Biden’s team has made progress with its economic stimulus package, while vaccine programmes have also led to a market rally during the opening of the year. One sign of the optimism was that record amounts of money flowed into equity funds during the week – $58 billion, according to data from Bank of America.

However, there are still concerns in the background. These include the high valuations of many stocks, stubbornly high COVID-19 infection levels, new variants of the virus, and vaccination delays in some countries.

On Friday, the UK woke to news that its economy shrank almost 10% last year – the largest drop in 300 years. The data served as a sobering reminder of the economic damage caused by COVID-19.

Last week, Jay Powell, the head of the Federal Reserve (the US central bank), pledged to continue supporting the world’s largest economy until it is on firmer ground.

The announcement reassured some investors, because support from central banks around the world was crucial to lifting markets out of their lows last year. Measures like low interest rates and asset-purchasing schemes have kept investors confident throughout the turbulence created by the pandemic. However, there are fears that an economic recovery this year could cause higher inflation, which would pressure central banks to pull back support to keep it in check.

Investors are cautious about what will happen when support is eventually tapered back, but comments like Powell’s last week mean that outcome is unlikely for now, noted Johanna Kyrklund, Chief Investment Officer at Schroders and manager of the St. James’s Place Managed Growth fund.

“Markets feel bubbly, but bubbles tend to get pricked by higher rates,” she said, adding: “For now, the central bankers are keeping their needles safely tucked away.”

President Biden wished his Chinese counterpart Xi Jinping a happy new year in their first telephone call last week. Coincidentally, some of the largest Asian markets were closed on Friday to mark the Lunar New Year, which signals the beginning of the Year of the Ox in China.

Among other things, the two leaders discussed how to deal with COVID-19, climate change, and weapons proliferation, according to a statement by the White House.

However, the conversation also covered thornier topics. The White House said the president raised concerns about Beijing’s “coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan”.

As the world’s recovery against COVID-19 speeds up this year, the Sino–American relationship will become a more influential force in markets. The pandemic has been the focus for governments around the world since it took hold last year. But as life returns to normal, investors can expect the relationship between the two largest economies to take centre stage once more.

Cryptocurrencies hit the headlines again last week as Bitcoin reached an all-time high of more than $48,000. The rise seemed to have been prompted by news that Tesla has invested $1.5 billion of its own funds into the token – and will soon accept it as payment for its cars.

The news renewed the debate around whether cryptocurrencies can work as proper currencies, given the regular and extreme swings in their value.

“Currencies should be pretty stable. They shouldn’t go up and down 200% in a year,” said Hamish Douglass, co-founder of Magellan, which manages the St. James’s Place International Equity fund.

He added: “It’s something we would pass on. But if you’re going to do it, treat it as a punt at the races.”

One part of the story has been overlooked by many commentators. The process of creating the currency, called ‘mining’, burns lots of electricity.

“It’s estimated that the electricity consumption from digitally mining Bitcoin is already greater than the total electricity consumption of Argentina, even before the latest spike in prices,” wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

As the debate about cryptocurrency continues this year, its proponents will have to grapple with that fact; especially now that environmental, social, and governance (ESG) concerns are front of mind for the world’s leading businesses and investors.

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

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