Fund Return 2020 - 2021

Fund return to 31/5/2021

Investment Commentary

Provided by Mercer - CIRT Trustee Investment Adviser 

Market Developments

Throughout May the global economic recovery continued. Many developed economies reopened as the vaccine roll out continued to surprise on the upside but ‘variant’ scares put the future of complete reopenings as well as the revival of international tourism on which many economies rely into doubt.

Nevertheless, forward looking purchasing manager indices suggested that the strong recovery momentum is likely to remain intact as reopened economies will at least benefit from domestic goods consumption and a revival in services, which are struggling to keep up with pent up demand in some cases. Supply constraints are hampering production, and labor shortages are emerging in some sectors.

This has kept inflationary pressures high, which is now being reflected in the numbers, particularly when compared to depressed levels from 2020. An exceptionally strong inflation reading in the US that exceeded already elevated expectations led to some market volatility during the month. While other regions have also seen an uptick in inflation readings, they have not been as significant as in the US.

Volatility quickly receded though and ended the month lower than it started. Global equity returns finished the month in the low positive single digits as inflation fears were once against superseded by the strong growth outlook and ongoing policy support, the latest example being the extremely expansionary budget proposals in the US and Australia.

Geopolitical risks were somewhat elevated during the month, with conflict between Israel and Palestinians in the Gaza strip, a cyber attack against a major US pipeline and the forced grounding of a European passenger plane in Belarus.

Bond yields were mostly unchanged in May in spite of the inflation scare, while credit spreads remained near their current lows. Companies continue to be able to fund themselves at extremely low cost to strengthen their balance sheets. In combination with the strong economic outlook, this has led to a reduction in perceived credit risk which investors see as a justification for the extremely low spreads.

Cyclical commodities are facing strong price pressure due to industrial demand. The increased resource need to build electrical cars compared to conventional ones adds to the already elevated demand for industrial metals. Oil is benefiting from increased mobility as economies reopen and car travel is picking up.

The rebound in gold has entered its second month. Range bound real yields have kept opportunity costs at bay for investors who want to hedge against inflation not being just transitory. Bitcoin and other cryptocurrencies tumbled in May. While cryptocurrencies have generally recovered a portion of their losses, bouts of significant volatility present a headwind for wider adoption.

Outlook

Our medium term macro outlook remains positive. In combination with natural immunity acquired in the latest COVID-19 waves, a large part of the developed world is expected to achieve herd immunity by early summer. Even if the majority of emerging markets are far behind the curve with vaccinations, China and most other Asian nations have been able to effectively manage the disease without vaccine and only limited restrictions. Full re-openings are expected to unleash a mini boom in the summer as pent-up demand is released and savings are spent. Even if households do not draw down all their accumulated savings, the mere return of the high saving rate to its long- term mean would be highly stimulatory in itself.

Monetary and fiscal policy is set to remain accommodative and policy-makers remain committed to step in to keep economies afloat and markets stable in case of temporary setbacks. This continues to limit the downside for risk assets and justifies further compression of the risk premia. The latest $1.9 trillion stimulus package in the US has added fuel to the fire. Even beyond immediate stimulus, fiscal policy is set to remain expansive. The proposed US infrastructure package of close to $3 trillion would lead to a boom in government investment. It could mark the onset of a ‘high pressure’ economy with governments spending aggressively to generate high rates of economic growth.

For companies, this means strong earnings growth from a low basis in an early cycle environment this year which is most beneficial for equities. At the same time, the unusual constellation of lose monetary policy and strong economic growth has increased inflation expectations and put pressure on bond yields. This creates an adverse environment for duration assets.

 NOTES

• Scheme Year to date performance is the period from 1 June 2020 to the most recent month shown.
• Performance shown is net of annual management charge.
• The investment choices offered by the Trustee will be regularly reviewed and may be varied from time to time.
• Before you choose a fund we recommend that you speak to a financial adviser. The CIRT Trustee preferred financial advisor is Milestone Advisory DAC.  You can contact them or your own financial adviser to assist you to review your investment choices. You can contact Milestone Advisory DAC via post: Canal House, Canal Road, Dublin 6, via email ([email protected]), or by phone (01) 4068020. The website is www.milestoneadvisory.ie.

If you require further information please contact the CIRT Team at [email protected]