Monthly Commentary – April 2021

Helped by the partial reopening of the economy and some robust first-quarter earnings, the world’s stockmarkets delivered strong returns in April.

Investors had cause for optimism as lockdowns gradually eased in some countries, reflecting progress with vaccine campaigns and receding levels of infections. The picture was considerably less positive in some regions, however. The situation in India escalated rapidly, and Japan declared a state of emergency in several prefectures. In general, though, the month’s data provided more evidence that the reopening of the economy is progressing well. This was particularly true in the US, where labour statistics and retail data pointed to a robust recovery.

As the world continued to reopen for business, first-quarter earnings reflected the improving economic outlook. Many of the most economically exposed companies reported encouraging updates: the banks, for example, factored in healthier credit conditions. Meanwhile, Netflix posted subscriber growth that was significantly lower than many had hoped. This suggests that ‘stay-at-home’ stocks have already reaped the benefits of lockdown and may now face leaner times.

The US Federal Reserve and the European Central Bank kept interest rates on hold and also pledged to maintain their pandemic stimulus measures until there are more compelling signs that the economy is fully recovered. We believe that policymakers’ willingness to let economies ‘run hot’ is likely to stoke inflation – a scenario for which many investors are not prepared, in our view.

Loose monetary policy has already significantly influenced some asset prices, and Fed Chair Jay Powell acknowledged ‘froth’ in equity markets in his press conference. The cost of paying for the pandemic response also became clearer as President Biden set out a proposal to raise taxes on higher earners.

All market sectors rose in April. The best performers were communication services, materials and information technology. These were helped by upbeat results from some of their largest constituents. Gains in energy, consumer staples and utilities were more modest.

North America was the strongest region, followed by Europe (ex UK) and the UK. The only region to record negative returns was Japan, where the rollout of the vaccine programme is lagging behind many other developed countries, with the result that lockdown restrictions have been tightened.

One of our largest gainers over the month was Wells Fargo. The company is one of the four biggest banks in the US, and we added it to the portfolio earlier this year. Following missteps by the previous management team, which focused too heavily on growth, we see an opportunity for renewed leadership to put in place a first-class governance and operating structure. In our view, that improving outlook is not yet reflected in Wells Fargo’s valuation.

As the fight against the pandemic makes headway, the economic risks for banks are diminishing, and that has been reflected in their strong first-quarter results. Wells Fargo is an example of the type of businesses in our portfolio that can capitalise on the recovery, but also has positive prospects that do not rely on any particular macroeconomic environment.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.