It has been a patchy start to the year for UK markets, but my goodness, we are in a better situation than we were this time last year.
At the time of writing, 60% of the adult population has had their first jab in the UK and 10% both jabs, the schools have reopened and soon we will be able to enjoy a drink and a meal (outside) with friends and family. Despite all the negative headlines, there is no denying that the medical and scientific communities have surpassed all expectations and we can be confident that meaningful progress is being made in returning to life as we knew it.
Within the global context, the gap between the haves (vaccines) and the have-nots is becoming increasingly clear as China, the USA and UK are moving into recovery mode, while much of the rest of the world is still grappling with the worst of the pandemic and vaccinations are not widespread. The human cost of the inequality is paramount, but the sad fact is that such disparity in international fortunes has more often than not led to increased global tension and less cooperation. We hope to see more positive action, such as the mooted 3.7 million vaccines being donated to Ireland and less blocking of vaccine exports at international ports.
From a UK perspective, the FTSE 100 Index was up 3.9% in the first quarter, managing to outperform the tech-heavy Nasdaq Index, which paused for breath after a stellar run. The market has focused overwhelmingly on two factors this year: rising interesting rates and COVID-19. With interest rates, the market is expecting a recovery to some kind of economic normality and so have begun to price-in higher inflation and higher interest rates. The first point to make is that, contrary to popular belief (from financial reporters), this is GOOD news that we are entering a recovery environment. Secondly, the move in rates so far has been a return to levels seen a year ago, before extraordinary measures were brought-in to support economies during the pandemic. Within the context of a normalisation in rates and, most importantly, economic growth, this should provide a supportive backdrop for markets. Governments worldwide remain supportive and we hope to see fiscal stimulus begin to pick up any slack as and when monetary stimulus begins to wane. Of course, there is scope for inflation to run ahead and policy errors from central banks, but we are a long way from this currently and we do not see a return to the 1970s any time soon.
The textbook market reaction to higher rate expectations is that commodity and financial stocks do well, while high growth technology and “bond proxy” healthcare names sell-off. This is exactly what happened in the first quarter of 2021. This resulted in the outperformance of so-called value stocks against their growth/quality counterparts. One can probably tell from the tone of writing that we do not believe that this move has legs, as it is quality and growth of a business that will out in the long-term. We took the chance of share price weakness in the likes of AstraZeneca, Experian and London Stock Exchange Group during the period to initiate new investments in businesses that we believe are of the highest quality and are well placed to deliver steady growth for years to come.
One final observation on UK markets in the first quarter is that the Deliveroo IPO got off to a rotten start, down almost a third on the first day of trading for the largest tech listing in London ever. As UK investors, we hope that more new and innovative businesses will be attracted to list in London, as US and Chinese markets have enjoyed the majority of these IPOs since 2000. It is a great shame that Deliveroo got off to such a bad start, as this may deter more such IPOs, and we hope that lessons have been learnt by all parties involved in this one. Rishi Sunak has clearly made enticing more new listing to London a top priority and we wholeheartedly support this.