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.

The past week brought with it more signs of economic recovery even prior to the easing of Covid restrictions, and stock markets continued to rally. Shares built on their gains of the first quarter as the US dollar remained on a downward course, suggesting an investor appetite for riskier assets¹.

For investors, this year is largely about how quickly the world bounces back from Covid lockdowns, and the most recent signs have been encouraging. On Tuesday, the IMF upgraded its forecasts, saying it expects the global economy to grow by 6.0% this year and by 4.4% in 2022². These rates of growth are substantial and consistent with a significant rebound in corporate earnings.

The UK economy is forecast to grow faster than the world’s other advanced economies both this year and next, with growth rates of 5.3% and 5.1% respectively³. That looks more plausible in view of business surveys released this week pointing to sharp increases in activity. The UK services sector recorded its fastest rate of output expansion in seven months in March, as confidence in the government’s roadmap helped spark a strong rise in new orders⁴.

The latest data out of the US also suggest the beginnings of a robust recovery. The economy added more than 900,000 jobs last month – far more than expected – with the demand for workers in the leisure, hospitality and construction sectors especially strong⁵. The signs are activity in America’s services sector has rallied even faster than in the UK, with improvements in March being the greatest recorded in a single month for almost seven years⁶.

Against that, a proportion of these developments will have been accounted for by today’s share prices. The US stock market is back in record high territory – as it was just prior to the onset of the pandemic. That would be more of a concern were it not for two additional developments: The extraordinary, additional stimulus applied by the government and Federal Reserve during the pandemic and increased visibility on interest rates. The latest indications from the Fed are that US interest rates will be kept close to zero until at least 2023, even as growth and, potentially, inflation increases⁷.

Analysts’ estimates suggest US company earnings could grow by more than a quarter in 2021, and by considerably more than that in sectors hard-hit by the pandemic – consumer discretionary (+58%) and industrials (+76%) for example⁸. Growth of this magnitude should help to underpin the valuations of US equities this year, but meeting or exceeding earnings expectations is likely to remain key to the success of individual stocks over the remainder of this year.

US government bonds remained encouragingly stable after the latest batch of data, suggesting markets did not consider it necessary to factor in additional inflationary pressures at this stage. Even so, bond yields are still somewhat elevated compared with the end of last year and are likely to remain a potential cause of disquiet among investors as the year progresses further.

At 1.7%, the yield on 10-year Treasuries is now about 2.3% higher than the yield on 10-year Treasury Inflation-Protected Securities, or “TIPS”, compared with a gap of just under 2.0% at the end of last year⁹. Investors are demanding a higher yield from conventional government bonds compared with those protected against inflation, because they justifiably believe inflation risks have increased.

The pound’s recent strength on the foreign exchanges – sterling currently trades at around 1.37 versus the dollar compared with a low point last year of around 1.16 – reflects a combination of dollar weakness as investors abandon safe havens and shift to riskier assets; as well as improving international sentiment towards the UK¹⁰.

The latter has undoubtedly been boosted by the rapid rollout of vaccines across Britain. This comes as a welcome relief after the UK’s extended period in the wilderness in international investment circles owing to Brexit uncertainties and a relative lack of exposure to fashionable, fast growing technology companies. Even after its recent rally, the UK stock market trades at a 30% discount to world markets in terms of the earnings companies are expected to achieve over the next 12 months, leaving room for a further period of relative outperformance¹¹.

Fidelity’s Select 50 list of favourite funds contains two UK funds with contrasting strategies, both aiming for long term capital growth. The first of these, the Fidelity Special Situations Fund, is a long established value oriented fund. It seeks to invest in unfashionable areas of the stock market, but specifically companies undergoing positive change.

The Fidelity UK Select Fund approaches the market differently, emphasising particularly businesses that have strong brands and robust balance sheets – “quality growth” companies, in other words. Unilever – attractively valued in relation to its US peers; Burberry, which has pricing power owing to its strong luxury brands; and Rightmove, which dominates its industry group, are among the Fund’s investments.

Both funds feature in Tom Stevenson’s five fund picks for 2021.

With a new tax year now upon us, if you are in a position to capitalise on this year’s ISA and self invested personal pension (SIPP) investment limits, doing so at the start of a new tax year, gives a greater amount of time for your investments to benefit from potential market growth.

If you’re not in a position to maximise your tax allowances straightaway, a regular savings plan could be the answer. Saving regularly has the important additional benefit of negating the need to time an entry into markets – a notoriously difficult, if not impossible task. It works well because, for a set monthly investment, more fund units or shares are bought during months when prices are low and fewer in months when prices are high. The net result is a lower average buying price through the market ups and downs.

The ISA and SIPP subscription limits are unchanged in 2021-22, so £20,000 per individual for an ISA; £9,000 for a Junior ISA; up to £40,000 for a SIPP; and £3,600 for a Junior SIPP.


¹ʼ ¹⁰ Bloomberg, 08.04.21
²' ³ IMF, 06.04.21
⁴' ⁶ IHS Markit, 08.04.21
⁵ US Bureau of Labor Statistics, 02.14.21
⁷ Federal Reserve Bank, 17.03.21
⁸ I/B/E/S data from Refinitiv, 26.03.21
⁹ US Department of the Treasury, 07.04.21
¹¹ MSCI, 31.03.21

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. Junior ISAs are long term tax-efficient savings accounts for children. Withdrawals will not be possible until the child reaches age 18. The Fidelity UK Select Fund invests in a relatively small number of companies, so may carry more risk than funds that are more diversified. Fidelity Special Situations Fund and Fidelity UK Select Fund may invest in overseas markets, so the value of investments could be affected by changes in currency exchange rates. The funds use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The funds may also use currency hedging. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. 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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