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DPM in Review : May 2021

Posted 3rd June 2021

Markets in review:

Equities Index Level YTD Change
FTSE 100 7,023 8.7%
MSCI – Europe 149 12.4%
S&P 500 4,204 11.9%
Shanghai Composite (China) 3,601 3.7%
Nikkei (Japan) 29,149 6.2%
Gold 1,905 0.5%
Brent Oil Futures 68.72 32.7%

* Figures as at 28th May 2021

DPM in review:

  • The UK has moved into stage 3 of the Prime Ministers roadmap out of lockdown, all non-essential retail shops, hair salons, pubs and hospitality venues can now re-open and serve customers both inside and out. The British public look eager to support the industries hit hardest by the pandemic, with a surge in shopping centre footfall and table bookings reported. The FTSE 100 responded to the re-opening by rising above the 7,000 mark for the first time since Pandemic induced sell off began back in February 2020.
  • The annual UK inflation rate more than doubled in April to 1.5% from 0.7% in March, as a rise in energy and clothing costs drove prices higher. House prices also rose 1.4% in April, taking the annual increase to a 5 year high of 8.2%.
  • Official GDP data shows the UK economy shrank by 1.5% in the first quarter of the year, leaving it 8.7% smaller than pre-pandemic numbers. However, data for March was better than expected, showing an increase of 2.1%
  • The Eurozone officially fell into a double-dip recession as GDP shrank by 0.6% in the first quarter of the year, following a 0.7% contraction in the fourth quarter of 2020. The ECB kept all current stimulus measures unchanged, but announced it was stepping up the speed of its pandemic emergency asset purchase programme. ECB president Christine Lagarde said that the Eurozone economy was “on crutches, relying on support on one hand from governments and on the other from the ECB.”
  • In the US the consumer price index rose 4.2% year on-year in April, this was up from 2.6% in March and above an expected rise of 3.6%.
  • US treasury secretary Janet Yellen said interest rates may need to rise to prevent the economy from overheating and to dampen the inflationary surge. After jitters were seen in the markets, Mrs Yellen clarified her comments, stating she was neither predicting nor recommending the US federal reserve raise interest rates.

DPM in action:

The one word that continues to be on all investors’ minds is inflation. How high will inflation go? Will these higher levels of inflation persist? What will the fallout be if interest rates are raised by central banks to combat rising inflation? All very pertinent questions and a topic of weekly discussion for the Laver Wealth investment committee members. With the inflation numbers in the UK, Europe and the US all beginning to tick up, the investment committee agreed on changes to be implemented in order to guard client portfolios from any potential inflationary shocks.

With the prospect of higher interest rates the investment committee decided it was time to adjust the fixed interest allocation of client portfolios. If interest rates rise, the yields on bonds follow, a direct consequence of this is that the price of the bonds themselves fall. Bonds have different maturity (repayment) dates. The further out the maturity date, the bigger drop in price there will be as the future interest becomes less valuable. Due to this reason, it was agreed that the long dated, inflation linked Government Bond fund should be sold. Using the proceeds of the sale, a reinvestment is to be made into two separate shorter dated bond funds.

When looking at the equity allocation, the investment committee decided that it was time to reduce our exposure to Asia and take profits on our Asia growth fund following strong performance as well as selling out of an additional Asia pacific fund. The funds are heavily invested in technology companies that have had considerable success during the last year. If interest do rates do rise the valuations on these companies may become unsustainable and the share prices may fall to reflect this. In order to try and protect client portfolios from any dramatic share price falls, we used the proceeds of the sales to initiate a position in a global dividend fund. The fund itself is invested in good quality, defensive companies with resilient cashflows and solid balance sheets, all qualities will help the companies navigate an inflationary environment and retain pricing power.

The advantage of the Laver Wealth Discretionary Portfolio Management service enables us to react and make changes rapidly for our clients as and when opportunities arise and to also be proactive when more defensive actions are required.

Quote of the month:

“It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat”

US Treasury secretary Janet Yellen commenting on the current economic environment in the US.

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