Markets steady as the economy comes back to life

Global equity markets have stayed stable in recent months as more and more people are vaccinated against coronavirus and economies continue to open up. While there was some concern about the impact of higher inflation on assets, the  market response was muted. Markets are forward-looking and have faith in central banks to keep inflation under control.

The MSCI World Index of global equities rose 1.0% in May, bringing year-to-date returns to 11.6% (local currency terms, including income). Bonds were marginally positive in May – with UK government bonds returning 0.5% – but returns have been -6.5% over the year so far (Barclays UK Treasury Index, total return in sterling

Coutts leading the way on responsible investing

We were immensely proud to be recognised for our outstanding approach to responsible investing at the WealthBriefing European Awards 2021 in May this year.

The awards are judged by an independent panel of industry leaders and awarded by the publishers of WealthBriefing Magazine. They look for wealth managers and private banks that set themselves apart from their peers and have something extraordinary to offer. We stood out from competitors for our ability to demonstrate that ESG is truly integrated into our end-to-end investment process.  

We’ve put environmental, governance and social impacts at the heart of our investing. It’s the right thing to do, not just for the world but as a way to enhance long-term returns. Making sure that the companies we invest in have robust plans to defend their revenues against climate change, social trends and poor governance is just common sense.

Read more about the award and responsible investing

Protecting our clients’ wealth for the long haul

Portfolio  returns continue to be ahead of  benchmarks so far in 2021. Longer-term, portfolios remain robustly ahead of inflation, preserving and growing the spending power of our clients’ wealth in even the most defensive mandates. And we’ve been making changes that we believe will be positive in the months ahead.

Cumulative returns calculated on sterling basis, including fees, charges and income to 31 May 2021. These data are based on composite performance, individual portfolio monthly returns are asset-weighted based on their respective asset values at the beginning of the month. Peer group returns provided by Asset Risk Consultants (ARC); end-May data represents ARC estimate. Benchmarks represent a static mix of equities and bonds in proportions relevant to each strategy. Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment. Sources: Coutts & Co, ARC. June 2021.

On the lookout for pockets of value

Having closed our US bank investment theme last month, we’ve opened a position in global healthcare. The sector has underperformed over the past year meaning valuations are increasingly attractive. Healthcare companies also tend to deliver decent returns as the economy moves from the initial recovery stage to a more steady growth environment, mostly because of their predictable earnings stream.

Overall, we remain neutral on the US – the economy remains strong, but a lot of confidence is already priced-in to markets. Finding sectoral divergences is one way to generate above-market returns when valuations are already high.

Switching attention from emerging markets to Europe

As the recovery continues, regional divergences in response to the crisis are beginning to create opportunities. With this in mind, we reduced our exposure to emerging markets and invested in European equities in May. 

Europe has been slower to vaccinate and implement fiscal support during the crisis, which depressed market sentiment at the start of the year. This is changing, though, as the vaccination program gathers momentum, and the European Commission has reached agreement on fiscal support.

A swift response to the crisis in some Asian countries saw emerging market equities rise in the last months of 2020 and early 2021, but performance has been more subdued recently. China has been taking steps to control inflation, which could reduce any positive impact on the economic cycle. US dollar strength is another headwind for these regions, which is likely to result in a challenging environment.

UK economy on the rise

UK equities remained positive thanks to the successful vaccination program and the market’s bias towards companies that do well during times of economic expansion, in particular the energy and financials sectors.

But rising investor confidence in the UK hasn’t just affected markets – the value of the pound has also risen steadily over 2021. This can be a drag on investment performance for sterling-based investors: as the pound rises, the relative value of investments in international assets valued in other currencies falls. It also has an impact on the performance of the FTSE 100, which is largely made up of multi-national companies whose international earnings can be eroded as sterling rises.

In light of the currency outlook, earlier in the year we adjusted our UK holdings to focus more on mid-cap companies that are more dependent on the domestic economy than overseas earnings. As well as avoiding some of the currency effects, these companies have benefited from the gradual opening of the UK economy over the spring and early summer, and pent-up demand from consumers. Retail sales, for example, were up 33.7% year-on-year for April.

Looking ahead at the evolving global economy

We believe the positive trend for equity is likely to continue as the global economy recovers from the impact of pandemic-induced lockdowns, albeit with potential for volatility. But the changing fortunes of Europe and emerging markets illustrate the importance of keeping abreast of the evolving global economy.

We’ll be monitoring markets carefully as governments and central banks around the world start withdrawing their emergency support for economies, while the potential for supply chain limitations to curb growth in some areas could lead to weakness in some sectors and regions.

long-term PERFORMANCE

Return data for funds are calculated net of fees, in sterling and assumes reinvestment of dividends. Past performance should not be taken as a guide to future performance. Peer group returns provided by Asset Risk Consultants (ARC). Benchmarks represent a static mix of equities and bonds in proportions relevant to each strategy.  The value of investments, and the income you get from them, can go down as well as up, and you may not recover the amount of your original investment. Source: Coutts & Co., Asset Risk Consultants (ARC), Morningstar, Reuters/Eikon Datastream, June 2021