The first six months of 2021 have been rewarding for investors, but what will the rest of the year bring?
The first half of 2021 was a much less traumatic ride for investors than the first half of 2020. With hindsight, last November’s Pfizer/BioNTech vaccine breakthrough announcement gave investment markets a fresh momentum that continued through the first two quarters of 2021, particularly in the US.
However, the drivers of performance have somewhat changed in the past 12 months. Last year was the year of technology stocks, with the likes of Apple, Microsoft and Amazon leading the way. In 2021, that has not been the case, even though the top five technology stocks account for more than 21% of the S&P 500 index value. Research by Bloomberg shows that in the first half of 2021, information technology (IT) was a drag on the S&P 500. Strip out IT from the index and it would have risen by 14.9%, not 14.4%. Alternatively, give each share in the index an equal weighting – so those top five companies become just 1% of the index – and performance over the first half would have been 18.3%.
H1 2021 Change
Dow Jones Industrial
Standard & Poor’s 500
Euro Stoxx 50 (€)
MSCI Emerging Markets (£)
The cooling of US tech stocks helps to explain why the Eurozone, as measured by the Euro Stoxx 50, matched the S&P 500 in the first six months of the year. Even that is not the whole picture though, as the dollar strengthened by about 2.5% against the euro over the period, leaving the US market the winner in currency-adjusted terms. Most indices are based on the relevant domestic currency, with currency-adjusted versions largely the domain of professional investors.
Will 2021 now prove to be the proverbial game of two halves? There are two obvious uncertainties ahead:
• During the first half of this year, inflation was on the rise globally. The worst/best example is the US where CPI inflation was 1.4% last December but rose to 5% in May. At present, the consensus view is that this inflationary jump is ‘transitory’. By next January, we will have a good idea whether that is the right judgement. If it is not, interest rates could rise – something the markets would not welcome. If it is correct, rate rises will likely remain distant and markets happy.
• The pandemic is not yet over, especially outside the developed world. Covid-19 has already surprised in a variety of ways and could do so again – for good or bad.
The first half of 2021 showed how markets change underneath the headline numbers. To benefit from such movements, professional investment management is vital.
The first half of 2021 showed how markets change underneath the headline numbers. If the flow of “…hits new high” headlines has given you doubts about investing now, there are several strategies to consider:
Instead of investing a lump sum all at once, spread the investment over a period. That way all your money will not get invested at a market peak. The corollary is that you may miss out on some investment return.
Keep an adequate cash reserve
Make sure you have sufficient instant access deposits so you can avoid cashing in your investments if you need funds quickly. A paper loss is just that until investments are realised – as events since February 2020 have demonstrated.
Be aware of sequencing risk
If you intend to draw on your investment immediately – for example by starting pension drawdown – a sudden market drop can have a dramatic effect on the sustainability of withdrawals. There are several approaches to limit this risk, such as holding a separate low risk reserve.
For more information on these and other high market strategies tailored to your personal circumstances, please contact us.
The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
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