PERSPECTIVE3-5 min to read

Poised for a rebound

We have benefited from the recovery in more economically-sensitive areas of the market, while maintaining our exposure to long-term structural themes.

30/03/2021
Shopping_spree

Authors

Caspar Rock
Chief Investment Officer

We currently have an “overweight” position in equities. This is based on our view that recovery from the pandemic, along with continued support from authorities, should be supportive for stocks.

The prospect of a strong economic rebound has meant that it is the more cyclical areas of the market that performed best in the first quarter. This is in marked contrast to the trend of the last few years, when growth stocks – particularly those in technology – have led the markets.

We have benefited from the recent rally in more cyclical sectors, though we still have a bias towards growth in portfolios. This reflects our continued conviction in the longer-term structural themes that I have discussed before – such as technology, healthcare and global infrastructure. We believe they represent multi-year opportunities.

Opportunity in active management 

The recent change in market dynamics could well mean that there is more of an opportunity for “active” managers to shine in 2021. There continues to be a wide dispersion of valuations in equities, with sectors and regions performing very differently.

Global markets recover ... but follow distinct trajectories

Performance of major global equity markets since the start of 2020

600891_global-markets

Source: Cazenove Capital, Thomson Reuters

We expect there to be further narrowing of the performance differential between those companies which were hurt by lockdowns and those which benefited. This should allow a wider range of active managers to perform well – in contrast to the past few years when outperformance has been limited to managers focused on growth opportunities.

Holding on to defensive ballast

There will be bumps along the road. Covid-19 remains a significant threat. Variants of the virus are a key risk and there could be renewed requirements for social distancing next winter. There are also risks arising from markets themselves. Falling bond prices, and rising yields, are a potential headwind for stock markets. Very elevated valuations in certain parts of the market could also be a trigger for volatility.

We therefore maintain the defensive ballast within portfolios through exposure to gold, government bonds and cash. While US bonds have been falling in recent months, the chart below shows they tend to perform well in times of more severe market stress. We have also increased diversification within our fixed income allocation through the addition of Chinese government bonds.  

Maintaining an allocation to defensive assets

Performance during equity market corrections

600891_maintaining-an-allocation

Source: Cazenove Capital, Bloomberg. Returns in GBP. Past performance is not a guide to future performance.

A word on cryptocurrencies

The rise of Bitcoin has been a much discussed phenomenon this year. We are watching with interest, and believe the underlying technology could have valuable applications. However, we are not currently investing in the space for clients. The risk/return characteristics of Bitcoin remain too unstable. Bitcoin's potential as a currency also looks doubtful, given limitations on transaction speeds and the lack of regulatory support.

Important information

This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Authors

Caspar Rock
Chief Investment Officer

Topics