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.

At the midway point in this year of post-pandemic recovery there seems, on the face of it, plenty for investors to be positive about. Stock markets have continued to rise amid signs of a global economic rebound and expectations government spending and pent-up consumer demand will drive a strong earnings recovery in 2021-22. The persistence of record low interest rates has continued to propel investors into riskier assets with, up to now, positive results.

Bonds, on the other hand, have moved into retreat amid these economic soundings. Rising inflation – which is already here – and the prospect of higher interest rates further down the track spell an increasingly difficult time for assets that pay a fixed income. Bonds retain their appeal as a safe haven in times of market stress, but continue to lose out to equities in a world of rising growth and inflation.

Meanwhile, the performance gap between growth stocks and shares in companies in traditional industries has narrowed. The competing narratives of companies able to capitalise on the great technological changes promised for a post-Covid world and of businesses benefitting in a straightforward way from broad economic conditions getting back to normal may well occupy investors for the remainder of this year and beyond.

Year-to-date in America, the Dow Jones Industrials Average and technology laden NASDAQ Composite have posted near identical returns.  Both indices reached new record highs at points during the last six months, with the NASDAQ being the more recent winner1.

Stock markets in Europe, with the notable exception of the UK’s, have posted even stronger returns than the US. Starting from a lower base and reflecting an earlier stage of economic recovery, European stocks have responded positively to an improving domestic outlook and the increased buying power of a strong US economy and dollar2.

Asian markets have been more disappointing, with new coronavirus outbreaks – even in countries that avoided earlier waves like Australia – weighing on sentiment. India and Malaysia have also been adversely affected, while a state of emergency has recently been extended in Japan. A credit slowdown in China – engineered after a record period for loans in the first quarter of the year – has been another cause for concern3.

The most notable economic events so far in 2021 have been outsized economic growth numbers – albeit boosted by easy comparisons with 2020 – and rising inflation. In the developed world, the US economy led the way in the first quarter, expanding by 6.4% compared with the same period a year earlier. China saw startling first quarter growth of 18.3%, although this should be viewed in the context of a deep decline in the economy as the coronavirus first struck during the same period in 20204.

In the US, the Federal Reserve Bank’s preferred inflation measure – core personal consumption expenditures – rose at an annual rate of 3.4% in May, significantly above target5. Clearly, this is already causing a certain amount of concern at the Fed. In June, a majority of its policymakers expressed the view that US interest rates would be increased by 2023 – a year earlier than previously thought.

From this point, we can look forward to a further period of strong growth in the US suggesting the backdrop for investors will not look a lot different from the first half of the year. The ending of restrictions in Europe and Japan and across emerging markets like India and Brazil stands to increase the uplift to world growth too, an event that should help to relax the pressure on shares in companies most seriously affected by lockdowns, such as cruise operators and airlines.

As the recovery takes further hold, we might also see a greater rotation away from the US to other markets with catch-up potential and stocks sensitive to economic conditions opening up a lead over their growth stock rivals. Europe, which has been starting to close the gap with the US in economic terms, could offer further opportunities in this regard. Data out this week showed European manufacturing growth at a 24-year high6.

As usual, there are risks. Companies in the US and Europe crushed earnings estimates for the first quarter; now stock markets require corporate results to match up with raised expectations. Any disappointment on this front could cause markets to catch a breath. As it stands, earnings are expected to grow by around 35% in the US in 2021. With oil prices now at around US$75 per barrel, energy companies are expected to report the highest earnings increases in the second quarter, followed by industrials (owing largely to airlines) and consumer discretionary companies7.

The US Federal Reserve could also get in the way of potential upside, especially if upcoming statements point to an earlier than expected end to record-low interest rates or winding down of money printing and asset purchases. Talks aimed at achieving bipartisan support for America’s infrastructure spending package could take more time, but the latest signs are an agreement will be eventually reached.  

As the world verges on a synchronised economic recovery across continents, it makes as much sense as ever to maintain a diverse exposure to world stock markets. Fidelity’s Select 50 list of favourite funds includes a number of funds that do just that.

The Rathbone Global Opportunities Fund invests in a relatively concentrated portfolio of around 60 stocks, with a focus on fast growing companies in developed countries that are “shaking up” their industries. To reduce risk, the Fund also has a number of holdings in businesses exhibiting slower, steadier growth. The Fund’s largest holdings are currently: PayPal; the international provider of laboratory equipment to the biopharma industry, Sartorius Stedim Biotech; Amazon; and Nvidia, the computer gaming graphics specialist now also engaged in artificial intelligence. Currently, around 62% of the Fund is invested in the US and 25% in Europe excluding the UK.

The Fidelity Select 50 Balanced Fund offers another solution. This fund invests in 30 or so other funds, mostly taken from Fidelity’s Select 50 list. It invests in both equities and bonds and is designed to provide investors with a smoother ride through volatile times. Alongside a 34% weighting in the UK, this fund currently has large exposures to Europe (21%) the US (24%) Asia (10%) Japan (5%) and smaller positions in Australasia, Canada and Africa.

Source: 

1 Bloomberg, 01.07.21 and 12.05.21
2 Bloomberg, 01.07.21 and 12.05.21
3 Bloomberg, 01.07.21 and 12.05.21
4 Bureau of Economic Analysis, 27.05.21, and National Bureau of Statistics of China, 20.04.21
5 Bureau of Economic Analysis, 25.06.21
6 IHS Markit, 01.07.21
7 FactSet, 25.06.21

Important information: 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. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. 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. The Rathbone Global Opportunities Fund and Fidelity Select 50 Balanced Fund invest in overseas markets and so the value of investments can be affected by changes in currency exchange rates. The Rathbone Global Opportunities Fund and Fidelity Select 50 Balanced Fund invest in emerging markets which can be more volatile than other more developed markets. The Rathbone Global Opportunities Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. Currency hedging is used to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures.  There can be no assurance that the currency hedging employed will be successful.  Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. 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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