Although stockmarkets globally rose sharply at the end of 2020 on the news of the COVID vaccine breakthrough, the momentum has stalled since the start of 2021.
Both the leading UK and US indices (the FTSE 100 and the S&P 500 respectively) are currently trading only 3% higher than where they ended December.
Looking under the bonnet, the first quarter of this year has seen a reversal of the winning sector themes of 2020, with the so called ‘real economy’ sectors such as oil & gas and manufacturing seeing their company share prices perform better than the technology companies who benefitted from the digital transformation forced by COVID.
One reason for this rotation has been anticipation of a reversion to normal once the vaccine rollout has been achieved, which should see economic demand return to pre COVID levels. The other, and arguably more important reason, has been the expectation of higher inflation due to the money printing undertaken by governments to support their economies during the pandemic, allied to a glut of savings about to be unleashed by locked down citizens who have been unable to spend their money as they would normally do over the past 12 months.
The so called ‘real economy’ sectors tend to be able to cope better with inflation as they can pass on the rising prices (rising oil prices being passed straight on at the petrol pumps as a classic example) whilst highly indebted technology companies can be expected to see their profits shrink as they have to pay higher rates of interest. The larger technology companies have also seen their share prices suffer from fears that they may be the focus of anti-competition regulation.
Whilst no one is arguing that technology shares will continue to dominate the future outlook, the current view seems to be that they have gone far enough for the time being and that there are better short term investment opportunities in the more ‘boring’ old economy sectors.
This article is issued by Portland Financial Management Limited which is regulated by the Financial Conduct Authority. Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This article may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.