Q1 2021
Despite a few challenges, the beginning of 2021 proved to be a fruitful period for many investors.
As expected, the pandemic and its global response continued to have a significant impact on financial markets in the first quarter of 2021. Investors closely monitored vaccination rates and the potential reopening of economies as the year progressed.
The new US president, Joe Biden, and his approved $1.9 trillion stimulus plan diverted some attention from the ongoing pandemic crisis. Coupled with a more optimistic outlook for emerging from widespread lockdowns and economic stagnation, equities remained highly favoured.
Global equities outperformed bonds at the start of the year, delivering positive returns during the quarter. This was supported by the successful rollout of COVID-19 vaccines in the US and the UK, as well as the positive news of the US fiscal stimulus. As a result, investors gained enough confidence to venture into riskier assets with higher potential returns. Commodities also experienced gains, particularly in the energy sector, driven by increased demand and expectations of higher inflation.
Overall, global stock markets predominantly saw positive returns in the first quarter, with developed markets outperforming emerging markets. The period was marked by rising bond yields and a shift away from growth-oriented stocks, including the flourishing technology sector, towards value equities.
In the US, the broad-based S&P 500 index reached a record high above 4,000, rising by 5.2% in the quarter. President Biden's confirmation of a $1.9 trillion fiscal stimulus package, coupled with an additional promise of $2 trillion in infrastructure spending, led to upgrades in consensus forecasts for US economic growth, with a projected 7% growth for the year.
However, the technology sector faced some turbulence, experiencing a sell-off that began in mid-February and spilled over into March. The increase in commodity prices, driven by hopes of a rapid global economic recovery, raised concerns about inflation. This, in turn, triggered a spike in US Treasury yields, diminishing the appeal of growth stocks.
In the UK, the FTSE All Share index delivered solid performance with a 5.2% return. Small-cap stocks, which often have a more domestic focus, also performed well, with the FTSE Small Cap index gaining 9.6%.
Despite lagging behind in terms of vaccine programs compared to developed markets, emerging market equities also ended the first quarter in positive territory. Only Brazil and China experienced negative returns during the quarter.
Cyclical equities focused on value continued their recovery since November when Pfizer Inc announced the first COVID-19 vaccine. The first-quarter performance showcased strong returns from the energy, financial, and industrial sectors.
However, technology, consumer staples, healthcare, and utilities lagged behind in performance.
The rise in US Treasury yields, driven by concerns about inflation, led to a challenging few weeks for growth stocks, resulting in a sell-off of tech companies such as Tesla Inc and Apple Inc. The benchmark 10-year yield ended the first quarter at levels comparable to the pre-pandemic era, following the largest quarterly increase in four years.
Bonds delivered negative returns in sterling terms as yields rose during the first quarter. Corporate bonds outperformed government bonds but still ended with negative returns. High-yield bonds produced moderate positive returns, benefiting from a healthy risk appetite and rising growth expectations.
Commodities generally experienced gains, including a 22% increase in oil prices, although gold prices declined by 12% in the first quarter. Commodities showed further signs of strength due to expectations of higher inflation.
The oil market attracted attention in March as crude prices traded above $70 per barrel for the first time since the COVID-19 pandemic. The price had been rapidly increasing since the announcement of COVID-19 vaccines in November.
More recently, the OPEC oil cartel surprised many industry experts by agreeing to maintain reduced output, contrary to expectations. Additionally, military conflict in the Middle East, with fighting in Yemen spilling over into Saudi Arabia, contributed to higher oil prices. Several Saudi oil installations were targeted by missile strikes.
