Market Update – March 2021
A very strong month for equities, ending the month with a volatile week, but nevertheless up 2.8%, the rally being broad based across regions but certainly not across sectors. At a global level, performance of energy (+13.2%) and financials (+9.1%) far outpaced bond proxies such as utilities (–4.9%) and consumer staples (flat). Blame the bond market. US treasury yields rose by more than 30 basis points, with the yield curve steepening as faster economic growth gets priced in. Even Japanese and German government bond yields rose, by approximately 10 and 30 basis points respectively. The move in yields (US yields have been rising since August last year) was initially driven entirely by rising inflation expectations, real yields remaining anchored, but real yields have now also started to rise. This is good news – yields remain very low, and they are rising for good reasons (stronger growth) not bad (policy mistake of early taper). In fact, central bank speakers have been at pains to clarify and re–clarify their dovishness – interest rates will not be raised, and bond purchases will not be tapered until unemployment falls meaningfully and the pandemic is truly behind us. It is noteworthy that equities were so strong in the rising yield environment, although some of the more expensive and frothier parts of the market, especially in the so called new “emerging technology” are beginning to lag significantly.
