The UK and North America led the major equity markets over the quarter with healthy performance, while Europe lagged and volatility in Asia resulted in relatively low returns. Since its March 2020 lows the MSCI World Index has risen by almost 50%.
The overriding theme over the period was a sharp rise in bonds yields caused by rising inflation expectations. 10-year US Treasury yields rose from 0.91% to 1.74%, a significant increase given their low starting point at the end of 2020. This reflects mounting evidence of a rapid economic recovery and concerns that high levels of stimulus may prove excessive and result in sustained inflation.
Following major jumps in Q3 2020 GDP and PMI figures in the US, UK and eurozone, this quarter brought more evidence of economic resurgence in the form of strong US manufacturing data and the highest EU manufacturing PMI on record.
The prospect of a strong economic rebound and rising inflation intensified the rotation from growth to cyclical and value stocks that began in late 2020. Investors sought companies most likely to benefit from recovery and social re-normalisation. This benefitted oil companies, miners and industrials, together with smaller companies and financials.
More than 60% of adults in the UK and 40% in the US have received their first COVID-19 vaccination, which bodes well for the economic recovery in both countries. By contrast, only 55% of the EU population is likely to be vaccinated by the end of June 2021, delaying economic recovery in the eurozone.
After a strong beginning to 2021, emerging market equities struggled to make further ground as the US dollar regained strength and concerns grew over rising levels of infection and the slow pace of immunisation programmes in some countries.
During the quarter the Fund benefitted from overweights and stock selection in the energy and industrials sectors, together with an underweight and stock selection in materials. An underweight and stock selection in utilities detracted from relative returns, as did stock selection in real estate and communication services.
At a stock level, top contributors to positive relative returns were International Consolidated Airlines Group, ASML, Snap-on (transportation tools, US), Boeing, Bank of America and JP Morgan Chase.
Main detractors from relative returns at stock level were Kerry Group (food technology, Ireland), an overweight in First Solar (solar panels and utility-scale PV power plants, US), and the Fund’s underweight holding in Alphabet.
Notable purchases during the period included Deutsche Börse, Mitsubishi Electric, Borgwarner (automotive supplier, US) and American Tower (wireless and broadcast communications infrastructure, US). Sales included Schneider Electric (energy and automation digital products, France), Coca-Cola, Fresenius (healthcare, Germany) and RBC Bearings (ball and roller bearings, US).
The Fund is currently overweight the UK and underweight Europe and Asia. Its largest sector overweights are to industrials, consumer discretionary and financials. Its largest sector underweights are materials communication services and utilities.
Recovery from a recession is usually a protracted healing process. This time, however, large sections of the economy have been effectively mothballed but remain relatively unscathed and recovery may be much quicker than following previous recessions. After almost a year of lockdown, during which consumers have been restricted in terms of what they can buy and do, there is plenty of pent-up demand and savings are at historically high levels.
The second half of 2021 is likely to see a sizeable consumer recovery, the reopening of the leisure and tourism industries and the refilling of supply chains. Service industries have been particularly hard-hit by the pandemic and are likely to see the strongest bounce-back once immunisation programmes have been rolled out. This is significant because services account for around 75% of US GDP, 80% of UK GDP and 75% of EU GDP.
The rebound in economic activity could be surprisingly strong and accompanied by further, but temporary, rises in inflation and bond yields. We are likely to see more outperformance by cyclicals and value stocks in the first half of 2021, followed by a rotation to growth stocks in the second half as inflation expectations and bond yields peak.
We continue to be optimistic about the opportunities available in the UK. UK equities have dramatically underperformed other major markets and, with a Brexit deal now secured, appear undervalued and a suitable target for M&A activity. The possibility that the UK will be the first major economy to implement its vaccination programme and return to social normality provides further grounds for optimism.
 GOV.UK, 7th April 2021, Coronavirus in the UK. https://coronavirus.data.gov.uk/details/vaccinations, Forbes, 4th April 2021, https://www.forbes.com/sites/jemimamcevoy/2021/04/04/40-of-us-adults-now-vaccinated-but-here-are-all-the-countries-doing-even-better/? sh=33488d1820f3
 euobserver, 6th April 2021 https://euobserver.com/coronavirus/151449
 US GDP from World Bank, data at 2018. UK GDP data from House of Commons Library, Components of GDP: Key Economic Indicators, 2019 data published 12 March 2021. EU GDP data from European Central Bank, Structure of the Euro Area Economy, 2019 data.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
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CLI01877 Expiry on 22/04/2022