While the vaccine news in early November was arguably the critical turning point in this cycle, providing light at the end of the pandemic tunnel, it was only in the first quarter of 2021, 12 months from the pandemic’s onset, that investors began to price in the recovery ahead and a return to post-pandemic normality. The recovery and reflation trade took hold, manifest most clearly in sharp falls in bond markets, suffering one of their worst quarterly returns in decades, and in a big rotation in equity markets, from the pandemic winners, in e-commerce, the digital and online world, to those sectors which have suffered most from lockdowns and restricted mobility. Over the quarter, global equities returned 4.9%, but within that, the sectors most sensitive to economic recovery produced substantial returns, including energy +22% and banks +19%, while those which had benefitted from the pandemic, such as IT, healthcare and consumer staples, were flat.

One year ago coronavirus began to ravage the global economy and stock markets. The ensuing recession was the worst since the Great Depression, yet over those 12 months global equities have returned almost 30%, despite a 35% decline in the initial few weeks of the pandemic. Emergency policy support on an unprecedented scale underpinned markets, more recently turbo-charged by the extraordinary success of the vaccine development and roll-out programme. The narrative has moved to the scale of the economic recovery ahead and its implications for inflation: the reflation trade has been gathering pace and came to dominate markets in February.

The surge in markets in late 2020, triggered by the positive vaccine news, Biden’s success in the US election and the favourable settling of the UK-EU trade negotiations, continued into the new year. Equity markets made a strong start while government bond yields rose. However, optimism waned as January wore on, concerns rising about Covid mutations, the pace of vaccine roll-out, especially in the EU, and the economic damage caused by tightened and extended lockdowns across many parts of the world, most notably Europe. By month end, expectations for a sharp economic recovery had been pushed out to later in 2021. Sentiment was also impacted by the bizarre antics of retail traders in the US driving heavily shorted stocks to nonsensical heights in an attempt to inflict damage on hedge funds, an investment tactic that could only lead to misery for many of those involved.

The world economy has entered its sharpest and deepest recession since the Great Depression almost 100 years ago, yet equities are in the midst of a raging bull market. By the end of May, global equities, as measured by the MSCI World index, had returned 35% from the market bottom on 23rd March, an exact mirror of the 35% decline between the bull market peak on 19th February and the March 23rd low. The pace of both the decline and subsequent recovery, including a further gain of almost 5% in developed world equity markets in May, is without precedent.

Three months ago, investors were looking forward to an improved year of global growth and corporate earnings. That was then. The coronavirus crisis is an era defining event; life before coronavirus and life afterwards. Above all it is a humanitarian crisis on an epic scale, the speed of its destruction amply illustrated by its spread: on February 29th there were 85,000 confirmed cases across 58 countries, with 2,924 deaths, by 6th April there were 1.25m cases and over 69,000 deaths as the pandemic reached 207 countries.

After a period of remission verging on complacency, markets were dramatically infected by coronavirus in the final week of February, with the sharpest weekly fall in equities since the financial crisis. The trigger was the realisation that the spread of the virus beyond China, and in particular into Europe, was not only inevitable but immediate, with Italy’s economic
heartland suffering an extremely serious outbreak which is still in its early stages. Taking a line from the damage caused to China’s economy, investors began to discount a very sharp contraction in economic activity in Europe, and globally, as the virus continues its inevitable spread, now in 86 countries and rising. The impact on economies is immediate, with factories closed, supply chains interrupted, travel and leisure activities curtailed, services withdrawn and large parts of the worst affected countries, China, Italy, South Korea and Iran (and the expectation of many more to follow), in effective lockdown.

Markets started 2020 in much the same way that they ended 2019, with investors buoyed by the expectation of ultra loose monetary policy for a long time ahead, diminished risks from trade wars and Brexit, and the prospect of a recovery from 2019’s growth slowdown as manufacturing showed signs of recovering from the slump of the past 18 months. The sharp escalation in the US-Iran feud in early January led to a surge in gold and oil prices but fears of a more widespread and deeper escalation of hostilities quickly dissipated. By mid month global equities had added 2.5% to the strong returns of 2019.

As the year began, so it ended, with yet another strong month for risk assets in December, capping one of the best years for markets since the financial crisis. Equities again led the charge, but leadership for once slipped from the US to emerging markets, which returned 7.5% in the month, well ahead of the US and MSCI World with 3.0% returns. This resulted in full year returns for the US of 30.7%, MSCI World 27.7% and MSCI Emerging Markets 18.4%. The ‘risk on’ environment led to safe haven government bonds weakening while high yield and emerging market bonds produced gains of 2.0-3.0%, with annual gains of 14.3% (US high yield) and 12.6% respectively.

Markets are heading into the final weeks of the year with some extraordinary gains for the year to date. November proved to be another strong month for risk assets, led by equities and in particular the US, up 3.6% for the month, taking its return so far this year to 26.9%. The contrast with the fourth quarter of last year, when Wall Street fell 20%, could not be more stark, and reflects to a large degree the policy pivot by the Fed, followed by other central banks, from tightening to easing policy. Markets have shrugged off the sharp downturn in global trade and manufacturing, as well as a tough year for corporate profits, which have been broadly flat, and have recovered all the ground lost in that sharp setback of Q4 2018. While the US has led the way and has reached a new all-time high other equity markets have also performed well: Europe ex UK gained 2.6% in November, 25.1% this year so far, while even the laggards among developed markets, Japan and the UK, have gained 16.4% and 13.3% respectively this year, after solid returns in November. The MSCI World index, dominated as it is by the US, was up 2.8% in the month, 24.0% year to date.

Risk assets made further progress in October, with equities leading the way. Wall Street gained 2.1% and reached a new all-time high, but, as in September, the best returns came outside the US: Japan was up by 5%, Asia ex-Japan by 4.5% and emerging markets by 4.2%. Among the major markets, only the UK was down (-2.1%) as a strong rally in sterling put pressure on the big overseas earners, which dominate the UK stock market. The improved appetite for risk was reflected in bond markets, with safe-haven government bonds flat or down while credit markets produced positive returns, led by US corporate bonds up 0.6%.