Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Stock markets ended last week and the first quarter of 2021 higher than at the end of last year, buoyed by the further, albeit uneven rollout of vaccines, hopes stemming from the future reopening of businesses and the likely passage of an immense infrastructure bill aimed at boosting growth in the US1. Closer to home, data showed the UK economy rebounded more than first thought in the second half of last year, fuelling hopes of a strong recovery in 20212.

While the nurturing of homes and gardens of many people have usurped social calendars for much of the past year, conditions are about to change again with the reopening of non-essential retail businesses on 12 April. There are, however, questions about the ways in which businesses and consumers will respond to the step changes in conditions that lie ahead.

Moreover, stock markets habitually discount events before they happen, so one of the keys this year will be monitoring how companies hit by lockdowns actually shape up when restrictions ease. Trading conditions may well improve markedly, but whether companies beat or fall short of earnings expectations will probably be the key to share price returns.

Identifying the shares that will perform best over the next year is likely to remain a challenge. You might think, for example, that airlines, non-essential retailers and pub stocks are now on course to beat the consumer staples and technology-based services that helped us through lockdown. But have markets already begun to discount likely changes in spending patterns?

To some extent, they probably have. Shares in financials such as Barclays and Aviva, and cyclicals including the sports and gaming firm Entain, the chemicals company Johnson Matthey and British Airways owner, IAG, have been among the best performers on the FTSE 100 so far this year3.

It’s hard not to be favourably inclined to shares in companies sensitive to changes in the overall economy though. Cyclical businesses will undoubtedly reopen to a substantial release of pent-up business and consumer demand this year.

Consumers seem well armed to increase their purchases. Data out this week showed the savings ratio – the proportion of a household’s disposable income that is saved – rose to 16.1% in the final quarter of last year, one of its highest levels on record4. Couple that with rebounding consumer confidence and the outlook certainly looks much brighter5.

Another salient factor is that cyclical companies are likely to find it easier to grow their earnings at eye-catching rates compared with the growth companies that held up well or surpassed expectations in 2020. The further reinstatement of dividend payments also looks set to add to the appeal of some companies hard hit last year.

It remains likely that different sectors will move back to full capacity at varying rates and, for now, there remains considerable uncertainty over the numbers. The airlines industry, for example, expects growth this year of between 13% and 50% compared to 2020, depending on restrictions in response to new variants of Covid-19. That would still leave activity – at best – down by 50% on 2019 levels6.

With potentially fewer hurdles to reopenings, pubs and restaurants might recover faster. A survey conducted by Lumina Research suggests consumers are either very or extremely likely to eat out at restaurants before June. However, once again, growth forecasts for the industry in 2021 span quite a range, from 6% and 32%, depending on whether restrictions on social contact are fully eased in June or persist in some form towards the end of the year7.

Some recent developments may well have triggered permanent changes in spending habits. The latest Nationwide House Price Index showed London was the worst performing region in the UK in terms of house prices in the year to March, as a working from home revolution freed more workers to pursue new lifestyles outside the capital8.

Some companies able to harness the benefits of technology to deliver truly useful services to customers may continue to perform well in 2021. The online grocery deliveries business Ocado says it sees the pandemic as having only accelerated an ongoing change in shopping habits, and that may well be the case9.

These few examples suggest the progress of shares over the year ahead will be nuanced and not necessarily cleanly split between cyclical and growth stocks. While it is widely anticipated the world and UK economies will rebound strongly in 2021 – an environment that favours unfashionable, traditional areas of the stock market – it may also be premature to dismiss the particular attractions of best-of-breed growth companies.

There are just days left to secure your full ISA or SIPP allowances for 2020-21. If you are uncertain about your immediate investing plans, remember you can open a Stocks and Shares ISA for this tax year and hold it in cash for the time being. However, miss Monday’s 5 April deadline and this year’s ISA allowance is gone forever – it can’t be carried forward to future years.

Tom Stevenson’s five fund picks for 2021 encompass some of the most important investment themes currently underway, and two funds dedicated to UK equities with notably contrasting styles. Meanwhile, the three-year-old Fidelity Select 50 Balanced Fund offers a diversified path into global markets via a broad selection of funds carefully chosen from Fidelity’s Select 50 list.

Source:

1 Bloomberg, 31.03.21
2,4 ONS, 31.03.21
3 Bloomberg, 30.03.21
5 OECD (2021), Consumer confidence index (CCI) (indicator). Accessed on 31 March 2021
6 IATA, 03.02.21
7 Lumina Intelligence, 03.03.21
8 Nationwide Building Society, 03.03.21
9 Ocado Group, March 2020

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Please note that Tom’s picks are not a personal recommendation for you. 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.

Share this article

Latest articles

Is the UK this year’s investment hot spot?

Britain looks well set if the recovery continues


Graham Smith

Graham Smith

Market Commentator

How will you use this year’s ISA allowance?

Take the time to consider what works best for you


Toby Sims

Toby Sims

Fidelity Personal Investing

Is inflation the cost of reducing poverty?

In this podcast Fidelity’s Ed Monk and Tom Stevenson discuss the inflationary…


Ed Monk

Ed Monk

Fidelity Personal Investing