Value, inflation, energy and UK smaller companies on the rise in 2021

When it comes to investments, the first half of 2021 has been characterised by four significant trends: value has continued to outperform growth; inflation has gathered pace; energy equities have bounced back; and UK smaller companies have risen like a phoenix from the Brexit and pandemic ashes.

Value outperforms growth

According to figures from T. Rowe Price, the ACWI Value index has returned 12.3%* so far in 2021 – almost double the 7.6%* return of the AWCI Growth index. This performance was mirrored emerging markets*. As more economies reopen, value should continue to do well, and rising inflation could also be a boon.

Inflation on the rise

US inflation, which started the year at 1.4%* has risen to 5%*. And America is not the only place where prices are rising – inflation is now 2%* or above in both Europe and the UK. China started the year in a deflationary environment (-0.3%*) and is now at 1.3%* inflation. Market commentators are split – some think it is a transitory phenomenon, others believe inflation will remain higher and become more embedded than it has been for some years.

UK smaller companies shine

Meanwhile, the UK stock market – which had been lagging other markets for some time – has finally come good, led by its smallest firms. Year to date, IA UK Smaller Companies is the best performing sector, up 19.6%**, the IA UK Equity Income sector is second with returns of 13.1%** and IA UK All Companies is fourth up 12.5%**. Only the IA Property Other sector breaks up the home market run in third place with returns of 12.7%**

Bonds struggle

In contrast, bonds have struggled so far in 2021, with only the global high yield index staying in positive territory*. Funds in the asset class followed a similar pattern with the IA Sterling High Yield Bond sector achieving the best returns of 3.2%** followed by IA USD High Yield Bond at 1.7% and IA Global High Yield Bond at 1.5%**. The only other bond sector in positive territory is IA Sterling Strategic Bond with average returns of 0.3%**.

Brazilian and energy equities surprise

And while the IA Specialist sector is very firmly mid-table, its performance masks some interesting stories.

Firstly, Brazilian equity funds experienced a rapid rise in the second quarter of the year – fifteen out of the top twenty performing funds were either Brazilian country-specific funds or Latin American funds^. The region is still very heavily commodity-based and has benefited from price rises in agricultural products and metals.

Secondly, over the whole six months, of all the funds available in the IA sectors, energy funds posted the best performance – eight of the top ten funds are specialist energy offerings, with returns in excess of 30%**.

The key driver of strong returns from global energy funds this year has been rising oil prices. The Brent spot price, for example, is up by around 50% from $51/bl at the start of 2021 to $75/bl today. This drives higher earnings for oil & gas producers across the globe.

According to Guinness Asset Management, this change in fortunes is thanks to mobility increasing in the US and Europe, as vaccinations accelerate, and lockdowns are lifted. “Freight and industrial activity are also surging,” the company commented. “The area of oil demand that continues to lag is aviation. Globally, commercial flights per day remain around 30% lower than in 2019. Even in this sector, however, there are signs of a sharper improvement. The recovery in US jet demand is accelerating, with jet fuel demand for domestic flights now around 15% below 2019 levels, having started the year 35% below.

With indications of re-opening international travel, plus the rise in activity across North America, Europe and China, we estimate global oil demand will increase by 3-4 m b/day through to the end of this year.”

Best forming Elite Rated funds in the first half of 2021:

RankFund/TrustPercentage returns so far in 2021**
1Liontrust UK Micro Cap29.1%
2TM Tellworth UK Smaller Companies24.6%
3LF Gresham House UK Micro Cap23.2%
4MI Chelverton UK Equity Growth22.8%
5GAM UK Equity Income22.4%
6Marlborough European Multi-Cap22.3%
7Fidelity Special Values21.9%
8Marlborough UK Micro Cap Growth20.3%
9TM CRUX UK Special Situations19.7%
10Slater Growth19.4%

 

*Source: T. Rowe Price weekly Market Recap, returns in local currency, market dashboard as at 18 June 2021.
**Source: FE fundinfo, total returns in sterling, 31 December 2020 to 24 June 2021.
^Source: FE fundinfo, total returns in sterling, 31 March 2021 to 24 June 2021

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.