Client Update - 25th February 2021

I am desperately keen not to recycle what you have already heard about Boris’s plans to slowly move out of COVID lockdown, so I will focus on the key dates. As a firm we are champing at the bit to get back out and see our clients face to face, but we have been clear in our desire to follow Government guidance to keep all our clients and staff safe. With this in mind, it looks like we may be able to conduct client meetings outside from the 29th March and inside from the 17th May. These are the earliest dates the Government have set out. We have proved adept at providing our client services from behind closed doors for some seven to eight months of the last twelve, so we are happy to wait a few months longer.

With the news breaking about Boris’s plans for a staged release from lockdown, we were hoping for a little more out of UK equities, however as with other markets, they have been held back by concerns over rising inflation and the effect on central bank policy. Alongside this, Sterling remains strong at over 1.41 to the US Dollar and whilst this has traditionally been a headwind to the FTSE 100, the mid cap (next 250 companies) in the UK, normally benefits from Sterling strength as mid cap companies are using sterling to buy goods and services. Mid-Caps have not rallied much so far in February.

The rise in short term inflation was expected. Rising future growth expectations and increased Federal borrowing can normally increase real interest rates. This is what has started to happen. As inflation rises, traditional economics suggests that central banks will start to raise interest rates to cool the economy and control inflation. The US Federal Reserve (FED) have been very vocal about this over the last 9 months and the FED chair, Jerome Powell, reiterated this week that they will tolerate higher inflation for longer. This is because they are now targeting an average rate of inflation, and as it has been so low for so long, they are willing to accept inflation above the 2% target for some time before they think about raising rates. Central banks are very aware of the state of the global economy as we move through the COVID pandemic. They are also very aware that COVID lockdowns are by their very nature deflationary (think about the collapse of the UK services sector in the last year), so the current extended lockdown should limit short term energy price rises driving inflation higher past the summer. This time last year, crude oil was collapsing in price and year on year, oil is almost three times higher today. This causes a push to inflation, but this should dissipate over the coming months.

We are into a new phase following the COVID-19 devastation to the global economy. In the US, there is evidence of increased poverty and other structural inequalities in the US. The FED has once again suggested that there is a mismatch between what is implied by financial market valuations and the real state of the economy. The comments from Jerome Powell this week add to our views that the FED will become more vocal in squashing market expectations of any change in asset purchases or the timeline for increases in interest rates. We expect this short-term volatility to pass.

Equity market sentiment has been supported by expectations of vaccines and subsequent strong growth. We are getting the vaccine roll-out now and the economic numbers look great. January saw retail sales in the US grow by a consensus shattering 5.3%. The current reporting season has been strong and the forecasts for the rest of 2021 and 2022 are optimistic, as are we.