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The FTSE 100 stock index of the UK’s largest companies this morning passed the 7,000 points mark for the first time since the pandemic struck.
7,000 has always been of large psychological importance to investors. Crossing it marks a fitting end to a week which has seen restrictions eased and hope offered to some of the UK’s most beleaguered sectors. But the UK is not alone today in celebrating its economic achievements.
There’s an old paradox from the Greek philosopher Zeno which tells of a race between the speedy Achilles and the sluggish tortoise. In Zeno’s race, the tortoise is given a head start and, despite Achilles’ speed, he can never catch up with the tortoise. The idea is that for Achilles to catch the tortoise, he must first reach the point where the tortoise started, by which time the tortoise will have moved further ahead. By the time Achilles gets to that next point, the tortoise will again have moved forward, and so on.
For every step forward Achilles takes, the tortoise will have crept further ahead, keeping him forever out of reach.
It’s a paradox that resembles the UK’s own situation. The UK, with its preponderance of “cyclical” sectors like services and industrials, could be one of the major beneficiaries of a post-pandemic economic recovery. According to the International Monetary Fund (IMF), it’s expected to grow by 5.3% over 2021, and 5.1% in 2022. That would make it the fastest growing G7 country over the next two years.
But it’s a fool’s game to dismiss the bigger global powerhouses. The US and China have each laid down serious markers this week that take much of the gloss off our own.
China currently has a very literal head start over us. ‘First in, first out’ of the pandemic, the country is already outpacing its pre-pandemic growth levels. It was the only major economy to grow last year - by 2.3% - while today it has posted record quarterly growth of 18.3%, year-on-year. For all our optimism over the future, China is already there.
Similarly, it’s a bold move to ignore what’s going on in the US. The country’s sheer financial might gives it a sizeable leg up on the UK.
The impact of Uncle Sam’s $1,400 stimulus bills paid out to low and middle-income households was made clear in yesterday’s US retail sales figures, which were up 9.8% in March compared with February. That’s the biggest monthly sales rise in 10 months since restrictions were first eased, and it could climb further as more states ease restrictions. US weekly jobless claims also hit their pandemic low yesterday.
If the FTSE’s voyage beyond 7,000 seems exciting then, here too, the US is happy to one-up. The positive economic data pushed Wall Street to record highs, with the Dow Jones industrial average rising above 34,000 for the first time and the S&P 500 also hitting a new peak.s
These figures can knock the wind out of your sails. China’s growth in particular looks jaw-dropping when much of the world has spent the last 12 months languishing. However, those freakish numbers may be papering over some cracks within.
As impressive as China’s GDP headline figures are, a quarter-on-quarter comparison tells a different story: GDP grew 0.6% in the first three months of this year, down from 3.2% over the final months of 2020. Not only is that a significant comedown, it’s also a far more useful comparison than looking year-on-year, which is skewed upwards by 2020’s low starting base.
Investors have already started showing doubts over China. Equities in the region were down in March, with investor enthusiasm cooled by efforts to tighten stimulus policy. China’s post-pandemic recovery may be levelling off.
Concerns are also mounting over the US’ rising stimulus bill and its effects on inflation.
Yesterday’s retail sales data may have buoyed spirits, but they came off the back of some eye-catching inflation data published on Tuesday. Consumer prices in March were 2.6% higher year-on-year, up from 1.7% in February. That’s the steepest climb since November 2009.
It’s inflation concerns that have been pushing US Treasury yields up and given government bonds one of their worst quarterly performances in 40 years. While the US Federal Reserve expects a pickup in inflation to be temporary, markets aren’t so sure.
We’ve also seen over the past six months a shift away from the highly-prized growth stocks that dominated at the start of the pandemic, prevalent in both the US and Chinese markets, and toward the out-of-favour value industries which we find closer to home. It remains to be seen whether this is the start of a long-term structural value rotation, or a temporary bout of enthusiasm.
None of this is to say that China and the US (and the UK) do not make for attractive long-term investment opportunities. Inflation concerns are valid and China’s rebound may be slowing, but these remain vast economies home to innumerable opportunities for foreign investors. As ever, being well-diversified geographically is key to capturing their upsides and protecting against the downsides.
If you want to know more about the prospects for global markets, Tom Stevenson looks at each in his latest Investment Outlook. You can find the Outlook, as well as its accompanying webcast and podcast in which we answer the questions you’ve been asking us, here.
Five year performance
at 31 March
Past performance is not a reliable indicator of future returns
Source: Refinitiv as at 31.3.21. Total returns with net income reinvested in USD.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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