Affinity Market Commentary January 2021

Market Commentary January 2021

UK shares remain dull despite EU trade agreement

The EU trade agreement and the rapid roll-out of Covid-19 vaccines should have been enough to see UK equities higher during the first month of the new year. Investors have been willing, for some time, to look through the pandemic to the recovery expected in 2021. However, after a seemingly bright start to the year, with the major UK indices showing gains of over 5% in the first week, confidence began to waver. Increasing case numbers, and the evolving expectation of lockdown restrictions lasting well into the vaccination programme took their toll on the UK and Europe.

Reddit investors drive volatility in US market

In the US, Reddit users on the WallStreetBets message board took positions in Gamestop and other companies that were being short-sold by US hedge funds. The hedge funds had been betting against the companies, but a combination of new buyers and then hedge funds trying to close their lossmaking short positions, drove the shares to phenomenal gains. Gamestop shares rose from $20 to a closing peak of more than $347. Hedge funds, lost billions of dollars, and share dealing services, most notable Robinhood, imposed restriction on trading in some stocks, leaving that company facing multiple lawsuits and possible bankruptcy.

Asian equities continue to return gains

The economies of Japan and the wider Asian region once again distinguished themselves from western markets in their resilience in the face of the ongoing pandemic. Investors continued to favour the region, which has recovered strongly from the virus and is leading the world back to normality. A combination of more authoritarian political regimes, public compliance with restrictions and the geography of the region (many islands) have all worked to help Asia out of the crisis ahead of other parts of the world.

Emerging markets lead performances so far in 2021

With global recovery, a return to growth and the return of inflation the common themes in many commentators 2021 forecasts, emerging markets were the  unsurprising leaders in January. Perhaps more surprising was that leadership among the emerging markets came from Europe and Africa, rather than Asia, which had been a strong driver of the asset class for some time.

 

 

Global equities started the new year on a strong note, building on the gains seen in November and December, and supported by the positive expectations around vaccine roll-outs and the pent-up demand in the economy being released over the next few months as lockdowns ease. Equities across the world were as much as 6% higher at one point, led by Asia, Japan and the emerging economies. Later in the month, however, US equities came under pressure from short-selling of some shares, such as Gamestop, leading to high volatility, and European news flow around Coronavirus drove shares lower in the major markets.

 

January was a poor month for the major European markets, with Covid-19 driving an increasingly bearish mindset, particularly towards the end of the month. A selloff in the last week of the month took many markets into the red for the year-to-date, as vaccine shortages, low take-up rates and the continued rise in case numbers lead to extended lockdowns, and fears for the economic outlook. Consumer and business confidence indicators reflected the gloom. Whilst, overall, manufacturing data remained relatively stable, the service sector showed the damaging effects of lockdown measures.

 

The pound held onto its gains from December and managed to edge higher against major currencies in January. In addition to a late trade agreement with the EU, the pound has been buoyed by hopes that the Bank of England would dampen speculation about a further rate cut to zero or below. Despite weakening against Sterling, the US dollar moved higher against the euro and yen, as vaccine roll-outs and continuing recovery reported in Q4 GDP led to optimism over the economic outlook versus other economies emerging from lockdown.

 

All major bond markets saw their ten-year sovereign yields rise in January, as investors entering the new year carried over at least a proportion of their risk-on mindset. The expectation of economic recovery and consequent rising inflation, led investors to ponder the likelihood that the next move in global rates may be upwards, and hence favour more speculative investments in their Q1 asset allocation. Across the global fixed income landscape, all the bond categories were weaker, with government bonds the biggest fallers, and high yielding corporates the most defensive.

*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.

 

Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically, the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Collidr Research (“Collidr”) for Affinity Integrated Wealth Management (AIWM) and while AIWM and Collidr use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor Collidr make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an Collidr performance benchmark. This benchmark is constructed from the average returns of all Collidr portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. Collidr Research is a trading name of Collidr Technologies Limited, registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and Collidr.

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