Quarterly Investment Update

Stocks encountered volatility but marched higher during the first quarter, but the highlight so far this year has been the sell-off in fixed income securities. The dovish tone from the Federal Reserve and Central banks worldwide and their intention to let the economy run hot, caused a spike in long-term interest rates. Inflation expectations are at multi-year highs while real yields are starting to pick up. Investors are now worried that a continuation of this yield pick-up might undermine the support for equity valuations.

The U.S. economic recovery is picking up steam as Americans increase their spending on items such as gyms, spas and airplane tickets. Record-breaking savings and stimulus, as well as rising vaccination numbers are starting to have an effect on the real economy, as demonstrated by jobless claims which have been declining since January and the downward trend in the unemployment rate. President Biden’s 1.9tn stimulus package signed in March, which includes delivering checks to every household and tax credits, is expected to pave the way for a 6% growth for the economy in 2021. US Fed chair Jerome Powell indicated that he is not worried about the recent rise in bond yields, as he believes they appear to reflect growing optimism about the economy’s prospects. The Fed reiterated that it will not adjust its policy in response to what it dims to be temporary price pressures.

Despite the rapid rise in new coronavirus cases and slow vaccination progress, rising exports helped drive a surge in Eurozone manufacturing. Purchasing managers’ index for manufacturing rose to 62.4 in March while the gauge for the services sector recorded a smaller-than-expected fall. Private sector economists however are slashing their forecasts for growth due to a resurgence in coronavirus cases and fresh lockdowns across Europe. Lastly, the sell-off in government bonds caught ECB’s eye, as it signalled its concern about surging eurozone bond yields, which spill over into higher financing costs for eurozone households and businesses. As a result, the ECB announced that purchases under the PEPP program will be ‘’conducted at a significantly higher pace” in the coming three months

The UK economy continues beating economic forecasts, suggesting that consumers and corporates are feeling safer and that brighter days lie ahead. The BoE said that the ‘’data so far suggest that first-quarter gross domestic product will be less weak than expected in the February monetary policy report’’. With more than 29m people receiving at least one dose of the vaccine and more people returning back to work, the UK is well placed for a strong rebound in the second half of the year.

The economic outlook for Sweden has strengthened in recent months – especially for manufacturing companies. Demand is expected to both increase and broaden as an increasing share of the population is vaccinated and lockdown measures are lifted. Swedish companies continue to report a high level of activity, mainly driven by foreign demand. The PMI came in at 61.6 in February, which is far above the historical average.

Chinese economic activity surged in the first two months of 2021. Industrial production, consumption, investment and home sales in January and February all jumped by more than 30% from the same period a year earlier. Unlike the U.S. and Europe however which are still flooding their economies with liquidity, China has started tightening the monetary and fiscal accommodation provided in 2020. China’s top officials have raised concerns about financial and housing markets bubbles, so they are withdrawing stimulus to prevent bigger imbalances and financial instability. These developments, together with a moderate GDP growth target of ‘’above 6%’’, have dragged down CSI 300, the country’s main equity benchmark, with the YTD performance standing close to 0%.