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Vaccine roll-out reverses investment trends

18 April 2021

Investment trends have staged a u-turn over the past six months, as the success of the vaccine roll-out increases investor confidence for the future, says AJ Bell.

Laith Khalaf, financial analyst at AJ Bell, said: “Looking back, the arrival of vaccines clearly prompted an inflection point in markets, which saw investment trends swivel on their heels and start marching in the opposite direction. The stocks and markets which had been worst hit by the pandemic suddenly found themselves in demand. By contrast, the crowded havens investors had flocked to over the course of 2020 began to see performance dip as investors reassessed their prospects in a post-pandemic world.”

While it is not unusual to see previously-neglected stocks come back into favour after a sell-off, Khalaf says what is more significant is that the arrival of vaccine programmes has prompted a reversal of trends which were entrenched long before the pandemic hit.

Khalaf explained: “The hegemony of reliable, secular growth companies and safe havens has been disrupted, and the ostracism of cyclical stocks rescinded, for now at least. The inflection point prompted by the arrival of effective vaccines is naturally clear to see with the twenty-twenty vision of hindsight, but the outstanding question is, as ever, where markets go from here.”

While there are factors which could see economic growth grind to a halt, including the resurgence of Covid-19 variants, Khalaf says that the global vaccine programme is likely to see the global economy gradually reopen, with vast fiscal and monetary policy helping to propel growth.

According to Khalaf, the strong performance of previously unloved areas of the market could attract momentum investors too.

He commented: “Momentum investors are fickle beasts, they don’t care what horse they’re riding, as long as it’s got a bit of speed up. So as the improved outlook for economically sensitive stocks manifests itself in the performance data, we could see this snowball increasing in velocity as it hurtles along.

“A balanced portfolio includes a blend of cyclical and defensive areas of the market, so investors shouldn’t bet the house on the reopening trade. But given the strong performance of some areas of the market in recent years, investors may find their portfolios are out of kilter, and ill-prepared for a leg of market performance that strongly favours more cyclical areas of the market, and indeed, a resurgence in the UK stock market. Some readjustment may well be in order, to get ready for a post-pandemic market.”

The three main UK equity sectors have proved the best performers since November 2020, a sharp reversal from the previous three years, while European funds and Global Equity Income funds have also grown in popularity.

At the other end of the spectrum, some of the worst performing sectors over the past six months had previously enjoyed cherished positions in the performance tables, particularly UK gilt funds and corporate bond fund sectors.

As well as the broader markets, there has also been a shift in appetite for certain FTSE 100 companies. Travel stocks, housebuilders, mining companies and financials have all prospered since the announcement of the Pfizer vaccine. By contrast, Ocado – which was the best performing stock in the FTSE 100 in the three years to November 2020, now ranks in the bottom 5 performers, while pharmaceuticals have also lost their shine.

The table below shows the performance of Investment Association fund sectors, excluding niche sectors with less than £10bn of assets invested in total. Three periods of performance are displayed.

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