It was a bumpy start to the year, with markets buffeted by new coronavirus strains, a change of power in Washington, and day traders bidding up unloved stocks. The good news is that the vaccine rollout is gathering pace around the world. On the economic dashboard, most headline figures remained steady, but there are signs that under the surface reflationary pressures are building.
The UK’s speedy vaccine rollout is a big positive for the medium-term domestic economy but had little effect on London markets. Partly this is because UK companies derive most of their revenue from overseas; a study by Schroders found that more than two-thirds of FTSE-100 revenue came from outside the country. While the UK stock market was down over January, our Gresham House Micro Cap fund bucked the trend to post +3% returns. One of its holdings, a biotech company based in Nottingham, rose +27%. Additionally, to capitalise on the reopening effect, we increased our weighting to UK small-cap early in the new year.
President Biden took the oath of office promising to pass a new $1.9 trillion stimulus package. The centrepiece of the proposal is a $1,400 payment to all individuals, buttressed by higher unemployment benefits and aid to cash-strapped states. The stock market was cheered by the package, which amounts to almost 10% of GDP, on hopes it could pour rocket fuel on the vaccine-driven recovery. The prospect is pushing bond yields higher, albeit from historically low levels. 10-year treasuries now yield over 1%, twice what they yielded last summer.
The US also saw a fascinating new development in online trading. Online traders coordinated to bid up the price of unloved stocks, such as GameStop. This forced short-sellers (funds betting that the shares will go down) to unwind their bets by buying shares, thereby adding to the upward pressure and sending the price spiking over 1000%. The practice is known as a short squeeze. Short squeezes have been around for decades, but the coordinated targeting by online investors is new. Readers can rest assured that CPN’s model portfolios have no direct exposure to GameStop or the affected hedge funds.
European markets were in the doldrums in January, hampered by a lackluster vaccine programme and virus restrictions continuing to hit profits at physical retailers. This has been bad for stock markets but kept demand high for safe-haven government bonds. The result is low bond yields; German 10-year bunds yield -0.5%, far below the US’s 1.1% or the UK’s 0.4%.
German Chancellor Angela Merkel is stepping down this year, and in January her party elected Armin Laschet as leader, putting him in pole position to take the Chancellorship. He is promising a continuation of Merkel’s centrist economic policy, perhaps with a more free-market tilt, and as an ex-MEP, he would be more pro-EU than Merkel. His ascendancy is good news for Lightman, our newest European fund because it provides reassurance that Germany’s big exporters (such as BMW, one of Lightman’s top holdings) can continue to flourish.
China’s trade surplus rose to a record high, as global demand for technology and healthcare products powered the country’s exporters. As China becomes richer it becomes a bigger market for western companies. Our technology fund’s largest holding is Apple, which in January reported record profits driven by a 57% rise in sales in China.
A new study by Tokyo University found that Japan’s workforce will shrink 20% by 2040. It is the world’s fastest-aging society, but the study suggests that Japan’s lead in robotics could help prop up its labour market by filling low-skilled jobs. Our Legg Mason Japan fund is positioned to benefit from this trend. One of its top holdings is Change Inc, which uses robotics and AI to make businesses more efficient; the stock price has quadrupled over the last year.
Global economic activity remains depressed this winter, but a vaccine-driven reopening combined with additional stimulus will reignite growth as the season’s turn. There are already signs that demand is forcing up shipping costs, perhaps the first hint of reflationary pressure. After a strong run-up to Christmas, stocks faltered early in the year. Here at CPN, we remain cautiously optimistic that the eventual cyclical recovery will benefit “risk-on” assets.
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