Wealth Management: Market Perspective

Better for people, worse for bonds

Kevin Gardiner and Victor Balfour, Global Investment Strategists


A year after Western lockdowns began, global stock markets have long since delivered the speediest ever rebound from a major fall. The economic mists are also clearing relatively quickly, as we’d thought they might. Data are painting a picture of a global economy poised to rebound strongly in 2021 – perhaps more so than most official forecasts have suggested.

In the US in particular, the stage seems set for some sort of economic fireworks from the spring, as an economy in which output has already more or less retraced the ground lost a year ago receives a further substantial fiscal stimulus. Even these days, $2 trillion is a lot of money.

In Europe, where the virus is still being more actively suppressed, economic activity has been less fragile than feared. Meanwhile, China’s data are difficult to read at this time of year even in normal circumstances, but there are few signs of growth faltering significantly.

Against this backdrop, it is no surprise that bond markets, led by the US, have been registering growing demand for capital relative to its supply. As investors expect excess capacity to be used up faster, they are expecting some upturn in inflation and higher real borrowing costs too.

Central banks are not ready to sanction tighter policy, and in some cases are actively trying to stop bond yields from registering the economic improvement. They may well change their minds as the data evolve.

As a result, investment risks have moved on again.

If the first half of 2020 was driven by worries about profitability, 2021’s risks may focus on the eventual consequences of a healthier business climate and full valuations. Put bluntly, last year was bad for people, but good for bonds. This year will likely be better for people, but worse for
bonds. Stocks are friendly with both, and their heartstrings face something of a tug of war as a result.

We think they can cope.

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