It is now more than a year and a half since the start of the Coronavirus pandemic and with many of the world’s stock markets close to their all-time ‘highs’, investors could be forgiven for thinking that the crisis is behind us, but as we know that is far from the case. Indeed, it is likely to be quite some time before the majority of the world’s population has been vaccinated, so we are not ‘out of the woods’ just yet.
Markets have been buoyed by the record levels of stimulus provided by central banks and the prospect of low interest rates for a while yet. While the Federal Reserve Bank in the US has indicated that it may have to start increasing interest rates if inflation becomes a problem, the decision will not be any easy one given the need to keep rates at low levels for as long as possible in order to help with servicing the huge amount of debt that has been accumulated since the start of the financial crisis in 2008.
The $64,000 question is where do we go from here? The UK might have moved out of Covid-19 restrictions, but they are likely to remain elsewhere. The emergence of the Delta variant and the prospect of a rise in inflation as economies open up again has been causing concern among investors with the result that markets have been more subdued of late than in the early part of this year.
As countries begin to emerge from the crisis, they are likely to experience strong economic growth, but it is impossible to make predictions with so much uncertainty over the direction the pandemic will take. It is those countries that have made the best progress in their vaccination programmes that are forecast to see the strongest economic growth this year. These include those in the US, the UK, and Europe.
Asian and Asia Pacific emerging markets, which had been the major beneficiaries from the strong economic recovery in China in the latter part of 2020 following its emergence from the pandemic have struggled so far in 2021 as a result of concerns over the China’s continued intervention in financial markets and the aggressive ‘wall of steel’ speech given by the president and general secretary of the Communist Party, Xi Jinping at the beginning of July. However, the longer term attractions of these markets remain.
The success of the vaccination programme bodes well for the UK and in the US, after an initial period of weakness following Joe Biden’s election as the 46th President, there has been an improvement in sentiment as the potential for a return to strong growth under the Biden administration has been recognised.
After a slow start in Europe, the vaccine rollout is now gathering pace, and this is expected to lead to strong economic growth across many areas of the region.
While markets look likely to remain unsettled in the short term, we remain optimistic about the outlook for equities as economic growth gathers pace. However, investors should be prepared for more subdued conditions in the next 12 months that in the last given that markets have recovered strongly from very low levels at the start of the pandemic and are now close to the ‘peaks’ once again.