Most equity markets enjoy a positive first half

Important information: The value of investments and the income from them can go down as well as up, so you may not get back what you invest.

The roll-out of vaccinations throughout most developed countries has allowed investors to look optimistically towards a post-pandemic future in which economies can return to some semblance of normality. The hope phase of the cycle from March to November last year has, therefore, given way to a growth phase in which the main driver of stock markets shifts from rising valuations to real improvements in earnings. Historically, this has tended to see less explosive but more sustainable share price growth. And this indeed is how things have panned out. The V-shaped recovery has run its course, but markets are in the main still rising at a useful rate. Perhaps unsurprisingly, given the scale of fiscal spending and central bank support, the US remains in the vanguard. The exception to the general rule looks like China where a lack of stimulus has dampened last year’s first-in-first-out enthusiasm.

Source: Refinitiv, Total returns rebased to 100 on the chart as at 1.1.21.

%
(as at 30 June)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
FTSE 100 23.3 0.2 7.7 -18.4 21.9
S&P 500 17.2 14.0 9.5 -7.0 56.4
TOPIX 12.3 13.5 -7.3 -11.8 39.3
MSCI Eurpoe 21.8 5.9 2.6 -6.3 35.8
China CSI 300 2.8 26.2 -5.5 -7.9 50.9

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets.

Bond yields: the reflation trade that ran out of steam

For fixed income investors, the first half of 2021 has itself divided into two distinct periods. The first three months of the year saw the so-called reflation trade drive bond yields higher in anticipation of rising inflation and, in due course, tighter monetary policy. The 10-year Treasury yield, shown here, rose from 0.9% to 1.75% in a matter of weeks. However, the US central bank has maintained its view that any inflation will be transitory, and investors bought into this dovish position from March. Yields have remained well-behaved despite some at times alarming inflation figures and clear hints from the Fed that interest rates will be hiked sooner than previously forecast. Because bond yields move in the opposite direction to bond prices, the net result for investors has been a capital loss on the bond portion of their portfolio but a smaller one than might have been expected at the start of the year.


Source: Refinitiv, 30.6.21.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.

Bitcoin, boom and bust

As the equity markets have moved on from 2020’s volatility, a new generation has searched for returns outside the investment mainstream. The flagship asset in this regard has been bitcoin, which has the profound advantage for a speculative vehicle of being an impenetrable black box for most of us. This makes it perfect for gamblers. The problem, of course, is that speculative momentum works in both directions and once the cryptocurrency peaked in the spring at around $65,000 there was nothing to provide any support as it headed back to earth. Technical analysts pointed to a floor at about $30,000, and limited supply and growing institutional interest make a case for gains from here, but it is hard to see bitcoin as anything other than an option that could pay off handsomely but might equally end up worthless. Good luck.

Source: Refinitiv, 30.6.21, total returns in USD

%
(as at 30 June)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Bitcoin 329.5 127.3 96.6 -25.1 278.2

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

Acknowledgements:

The views in this report are derived from a variety of sources within and outside Fidelity International. They are based on the house view of the Fidelity investment team and other sources. However, the report is written for a UK personal investing audience and the ideas are explicitly linked to the Select 50 list of our preferred funds. We consider this to be the best way for our investors to implement the ideas discussed in the Outlook. I would like to thank, in particular: Salman Ahmed, Andrew McCaffery, Wen-Wen Lindroth, Jeremy Osborne, Gary Monaghan, Leigh Himsworth, Ayesha Akbar, Jeremy Podger, Neil Cable, Andrea Iannelli, Kasia Kiladis and Natalie Briggs.

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