Coming into the new year, investors had their minds set on the prospect of an economic revival during 2021. With the impact of last year's volatility an all-too-present memory, government rhetoric encouraging a sustainable and widespread recovery raised hopes for a strong start to the year.
The first few months have indeed been bumpy. The short-term economic impact of the UK's exit from the European Union will be small in comparison with the slump in output brought about by the pandemic.
Recent figures from the Office for National Statistics show the economy shrank the most in 300 years in 2020.
Despite this, there is reason to be optimistic. The UK is ahead of other European countries in vaccinating its population, and if daily rates remain at their current level, we will likely achieve herd immunity by mid-July, which implies an earlier exit from lockdown and a quicker return to growth.
Indeed, the IMF forecasts the UK economy will grow at a faster rate than other major European countries in 2022, making it an increasingly attractive place to invest.
Analysts also anticipate the technological advancements fast-tracked by the pandemic should provide a boost to productivity across sectors. Higher rates of output should help to offset the negative effects of a shrinking labour force, and the productivity losses from Brexit.
Combined with the expected easing of lockdown restrictions and the gradual reopening of the economy for the third time, UK trade looks set to rebound heading into the summer.
Amid all these positive signals, how can investors position their portfolios to take advantage of these global drivers?
A turning point for US growth stocks?
For retail investors, the US has long been the place to be invested, given its outperformance relative to other parts of the world. After four fairly tumultuous years under Donald Trump, January's news of the now-established Joe Biden administration did much to settle investors' nerves.
A more stable economic outlook under the new President, along with the successful delivery of a $1.9trn coronavirus relief package, gave the US a further boost in the first few months of 2021.
However, growing concerns over inflationary pressures caused markets to turn jittery in February, bringing a swift end to Biden's honeymoon period. US treasury yields have already climbed to pre-pandemic levels and February fund flow data showed an overwhelming preference for investments in interest rate-sensitive categories such as financials and inflation-linked bonds.
Many of the US tech stocks that have proven popular with investors in the past twelve months have also seen their share prices dampened, as yields have continued to rise, putting downward pressure on stocks' values.
Valuations remain high in general, and US stocks are widely expected to deliver lower returns in the coming years.
For investors seeking to incorporate US exposure into their portfolios, key to consider is whether individual companies' business models stand up to the structural changes witnessed lately, along with business moats and proof of rising market share.
Cyclical firms that typically benefit from rising profitability during an economic recovery, such as hospitality and travel, will likely continue to outperform. We also see opportunity in the sectors most closely aligned with the Biden administration's broader policies, such as infrastructure.
Seen as critical to addressing urban/rural connectivity and inequality challenges, and creating jobs, infrastructure spending will be vital to the US to maintain its role on the global economic stage.
However, the current height of valuations, and subsequent low-return outlook for US stocks, should not be overlooked.
Now may be a good time to revisit your investment portfolio to ensure you are diversified across geographies, sectors and company size, as well as benefiting from potentially higher returns in other parts of the global market.