How are global markets shaping up for the rest of the year?

For investors and markets, 2021 so far has been dominated by the global economic recovery from the coronavirus pandemic.

Markets have been able to reap the rewards from the progressive opening up of economies around the world. But as we find ourselves at the beginning of the second half of the year – with the UK more or less fully re-opened – you may be wondering where do we go next?

In July’s Skipton insight, we speak to Richard Dunbar – Head of Multi-Asset Research at Aberdeen Standard Investments. He shares with us how he sees markets shaping up for the rest of 2021 and slightly beyond.

But first, here’s a reminder of how markets fared over the first half of the year.

Western markets lead the way

When it comes to periods of positive economic growth, shares generally tend to do well. And across the board stock markets around the globe rose during the first six months of 2021.

The US, UK and Europe were all buoyed by ongoing stimulus support, reopening of economies and successful vaccination programmes. After lagging behind at the start of the year, Europe was well and truly able to kick start its vaccine rollout – making up some of the ground it had lost on the UK and the US. Markets in Europe – not including the UK – were even able to post stronger returns than the US for the period.

Emerging markets did lag behind a little due to ongoing infection rates in some regions, but nevertheless, still managed to deliver returns for the first six months of the year. China, first in and first out of the pandemic, has struggled to attract investors lately due to a lack of ongoing stimulus relative to that seen elsewhere. A slower vaccine rollout compared to other developed nations, and a contracting economy across the first three months of the year meant Japan has been slightly out of favour with investors.

Along with shares, your investment portfolio may also feature other assets such as bonds, property or commodities. The performance of these assets could be just as important for your portfolio, so let’s have a look how these have also fared.

Bonds slightly more mixed

Compared to shares, bonds tend to get the raw end of the deal during periods of economic growth. That’s because bonds are more reactive to inflation and interest rates.

During the first three months, the 10-year US Treasury bond rose from 0.9% to 1.75%. This was due to increasing expectations that the US Federal Reserve would bring forward an interest rate rise in order to dampen inflation. But from April to July, the yield has fallen back to about 1.5%, as the Fed stuck to its stance that any inflation would only be temporary – with no need to hike rates just yet.

Commodities top of the class

Copper, which is seen by many as a great representative of the health of the economy, rose rapidly over the period, hitting all-time highs. Oil also continued to prosper in line with economies gradually starting to open up, as this means as increase in oil usage – the cost of Brent oil is around $75 per barrel, not so long back it was trading at below $20 per barrel.

Real estate has also thrived – again a reflection of the health of the economy. After a promising first quarter to 2021, between April and June the performance of property proved even stronger. Ranking it as one of the best asset classes for the quarter.

So far, so good

For the main, it’s been a positive start to 2021 for investors. But what can we expect for the second half of the year?

This is where Richard Dunbar – Head of Multi-Asset Research at Aberdeen Standard Investments comes in. Richard provided us with his market outlook for the remainder of 2021 and beyond.

Richard Dunbar

We’re almost certain to see huge global and economic growth this year, and next year, and to a lesser extent the year after – as Covid restrictions are lifted, as the vaccine roll out continues at pace and as the global economy opens up again.

Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments

“We’ll see a slight reduction in the stimulus that governments and central banks have given to the global economy, via low interest rates and tax cuts. Stimulus will be deemed less necessary as we all get back to work and get back to something more normal.

“Looking at the assets that might benefit from global growth, we expect to see reasonable returns for shares going forward. Expectation for most bond markets are more modest from here, given low starting yields. We expect returns from real estate markets to broadly match those of shares, as economies open up and some of the previously less popular areas of the market see more realistic valuations. So a much better global economy, after such a difficult eighteen months, and reasonable returns from the assets that benefit from that as we move forward.”

We’re not out of the woods yet

Richard continues, “With that said, we see significant risks around this central case. We’ve only got to look at the UK, and the various implications of a new strain of the virus that pushed back the ability to open the UK economy. And we’ve seen variations of that across the world. Those risks around that clear opening up of the global economy still remain.”

There’s also inflation to consider – perhaps the biggest risk to markets.

All eyes are on the US Federal Reserve (Fed) and whether they’re going to hike interest rates in reaction to rising inflation. An interest rate rise could help manage spending and reduce upwards pressure on prices, but it also increases the cost of borrowing for individuals and companies, which is when it becomes a hinderance to stock markets. As things stand the Fed are adamant that any inflation is temporary, and therefore there’s no need to increase interest rates.

So long as the Fed remain clear with their messaging, the threat of high inflation is currently not discouraging investors. So much so that investors are piling money into global share funds at record rates – showing that for the time being, investors are positive about the road ahead.

A year of change

Richard also took some time to reflect on how some of the changes brought about by the pandemic may help the recovery of the global economy going forward.

He explained, “Looking at how the global economy has behaved through the pandemic – it has been interesting. Last year was terrible in terms of the shrinkage we saw in the global economy, but not nearly as bad as some economists had feared.

“We’ve seen real innovation from individuals, from countries and from companies. Taxi drivers became Amazon drivers. Restaurants became takeaways. The ability to have video call meetings with everyone in the office was deemed impossible by IT departments 18 months ago. As soon as the pandemic hit, everything became possible.

“The innovation, the flexibility and the ability to change has been a real driver of global economies and we’ve seen that throughout the world. It’s a real interesting facet – some of the damage done by Covid will be counteracted by some of the innovations we’ve seen.”

It’s all about the long-term

As investors, it’s important to appreciate the degree of uncertainty the pandemic brought about to global markets and economies.

As you can take from Richard’s analysis, there’s no doubt the global economic recovery has gathered momentum since the start of the year, and there’s every chance there is more yet to come.

But it’s also important to be aware that tougher times may lay ahead – especially if inflationary pressures do stick around for longer than anticipated. There’s also the chance of more modest returns from here on, due to the suggestion that economic growth has hit its peak. Then there’s the obvious risks from the path of the virus, which is expected to linger for some time.

All told, the short-term outlook is looking positive for now – and that’s great news. But as we always stress, we can’t be certain. And that’s why it’s vital you remain focused on the long-term and your future goals that led you to invest in the first place.

As Richard concludes, “It’s absolutely crucial to keep focused on the long-term. One of the sure-fire ways of losing money in markets is to be whipsawed by the short-term news around markets.”

Important information

Please bear in mind that our comments should not be considered as advice, and the economic and market conditions of the past may not be repeated in the future.

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