A year has passed since the World Health Organisation (WHO) declared COVID-19 a pandemic. In the year since, tremendous effort has been expended to stop the spread of the virus, and protect people and economies. Whereas this time last year, equity markets were falling sharply, and corporate bond spreads were widening dramatically, many equity indices have now reached new highs and corporate bond spreads have narrowed, as COVID-19 comes under control in many parts of the world.
The UK and US have pushed ahead with their vaccination programmes with a sense of urgency. Given the success of these, the US and UK economies should recover sooner than those in Europe.
Economic data has improved, and recovery appears to be underway, supported by additional economic support from Central Banks. In the US, President Joe Biden has signed the latest in a long line of stimulus packages. He is now working on an infrastructure plan, with an emphasis on sustainability and the green economy. The initial proposition is for a further $2.25 trillion in spending.
The rebound in US stocks has provided positive outcomes for most portfolios through exposure to the Mega-Cap Stocks, such as Facebook, Netflix, Amazon, and Google. The Federal Reserve (Fed) remains committed to purchasing $120 billion of bonds each month and has indicated that it will give markets plenty of notice before tapering these purchases.
However, the huge stimulus has sparked concerns over inflation, with the potential for interest rate rises if inflationary pressures prove to be greater than expected. The European Central Bank (ECB) has predicted that any rise in inflation this year will be short-lived, and expect it to fall below the 2% target over the next few years.
The vaccine rollout in Europe has been slow, with doubts raised about the safety and efficacy of some of the vaccines. This has resulted in a rising level of cases again, with renewed lockdowns delaying the economic recovery. ECB President, Christine Lagarde, called on the EU to speed up the delivery of the €750 billion pandemic recovery plan that was agreed on last year.
We continue to expect a strong rebound in growth this year. Companies that suffered during the pandemic will recover some of their earnings, but cash reserves have been seriously depleted. Many long-standing companies will undoubtedly be lost to the ever-changing (post-COVID) world, and there may yet be further twists and turns before normal service is resumed.