P. 1About Investing. Investing through the global economic cycle.

Regardless of what is happening across investment markets, the global economic cycle continues to run alongside, playing an important role. As the global vaccination programme progresses are we now entering a post-COVID-19 expansion phase?

Markets began 2020 in the late stages of a bull market that had started in March 2009 during the Global Financial Crisis.¹ The pandemic, however, brought it to an abrupt end. Global economic activity ground to a virtual halt in the first half of 2020, with the International Monetary Fund (IMF) reporting an estimated 3.3% contraction in gross domestic product (GDP) for the year.²

In April the IMF increased its global growth forecast from 5.3% to 6% in 2021 as economies begin to stabilise. The revision reflects additional fiscal support in some large economies, vaccine-powered recovery and the continued adaptation of economic activity.³

There is a growing feeling that we’re now through the worst of this economic downturn, but what might be next?

Investing through the global economic cycle

The economiccycle and COVID-19

Economic cycles are valuable in helping us to understand how markets behave. Each cycle has four main stages - peak, recession, trough and expansion (or recovery). The peak is when the cycle is at its highest point following an expansion stage, although it is often identifiable only in retrospect. The recession (or contraction) stage features a slowdown in growth, with lower returns and increased volatility. This typically leads to a trough, the point at which the contraction bottoms out before the economy and (traditionally) markets begin to recover and expand back towards a peak.

ABOUT INVESTING

P. 2About Investing. Investing through the global economic cycle.

Some investments are more sensitive to the global market cycle

One advantage of understanding the stages of the economic cycle is that it helps give us an idea of the types of companies most likely to perform well as economies slowly begin to reopen after COVID-19.

The fortunes of some companies and sectors can be relatively independent of economic conditions and cycles. For example, if the biggest theme driving a certain stock is a long-term trend such as climate change or the ageing population, it might not be particularly sensitive to movements in the economic cycle.

Other companies are, however, much more sensitive. These are often referred to as cyclical stocks. They are typically companies that manufacture and/or distribute products or services that tend to do better when the economy is on the up. Examples include property companies, restaurants, hotels, airlines and luxury brands, demand for which can be expected to decline when the economy is on a downturn.

Sectors linked to trends that accelerated during the pandemic may also thrive in the recovery period, not least the technology companies that gained from the increased dependence on digital channels.⁴ However, bonds will likely begin to look less attractive if (as generally expected) inflation and interest rates rise over the coming months.

PeakThe economy hits

a high point.

ContractionGrowth in the economy

is going down.

TroughThe contraction comes

to an end.

ExpansionThe economy is on the

up again.

What we don’t usually know, however, is how long each stage is likely to last and what will follow it, as they don’t always follow each other in ways that we would expect.

There are certain shifts that investors can look out for as the cycle moves from contraction towards expansion, however long that transition takes. Assets such as shares are usually less in favour during the trough stage. At this point investors may prefer traditional ‘safe havens’ such as gold and government bonds. However, shares generally become more popular again during expansion as economic indicators improve and investors buy shares in the hope of benefiting from a recovery.

P. 3About Investing. Investing through the global economic cycle.

Inflation, interest rates and your portfolio

There are two main reasons many expect inflation and interest rates to rise. One is that governments and central banks are likely to remain in stimulus mode until the recovery from the pandemic is more firmly established. The second is that, as lockdown measures ease, households are likely to begin spending cash they’ve built up over the past year.

In the US, the world’s largest economy, Congress approved a substantial $1.9tn stimulus package in March including means-tested direct payments of up to $1,400 for millions of Americans and it’s estimated $1tn in savings has mounted up during the pandemic.⁵

Rising inflation puts pressure on policymakers to keep it under control by raising interest rates. This, in turn, raises borrowing costs, which have been exceptionally low in recent times. Inflation and interest rate decisions also tend to affect the relative value of currencies, with higher rates of inflation tending to devalue a currency relative to those for countries and regions where inflation rates are lower.

As all of these forces combine, different assets in your portfolio may be affected in different ways. Upward pressure on inflation and interest rates usually means downward pressure on bond prices. Commodities, such as oil, gold or coffee, tend to rise in line with inflation as they reflect the demand for goods and services that drive prices up. For shares some sectors, such as utilities, are largely insulated from the negative effects of higher inflation and so benefit compared to others. The fortunes of companies that import, export, depend on foreign tourism or earn profits overseas can also be affected by changes in currency values.

Expected shifts in inflation and interest rates may affect market volatility too, which is influenced by investor sentiment about the likely future value of different assets. Typically, the greater the future uncertainty, the greater the potential volatility.

Source: IMF, 2021: World Economic Outlook (April 2021)

Inflation Rate, average consumer prices (annual percentage change)

P. 4About Investing. Investing through the global economic cycle.

% M

SCI W

orld

Inde

x

Stay up-to-date with our latest Markets and Insights at santanderassetmanagement.co.uk.Learn more

1 CBS News – The 11-year bull market is dead. Here’s what a bear market means, 12/3/20 2 and 3 The International Moneraty Fund – Transcript of April 2021 World Economic Outlook Press Briefing, 6/4/21

4 Tech Monitor – Why Big Tech stocks boomed in the pandemic, 16/12/20 5 The New York Times – Inflation Fear Lurks, Even as Officials Say Not to Worry, 21/3/21

While economic cycles are useful in helping investors understand the behaviour of markets and how to invest accordingly, predicting exactly what’s going to happen next is virtually impossible. That’s why it’s so important to have the basics in place.

This starts with ensuring your portfolio is sufficiently diversified across a range of different assets, geographies and sectors, to spread risk and therefore reducing your vulnerability to a downturn in one or two specific areas. One way of doing this is to invest in multi-asset funds which can invest in a range of different assets, sectors and fund types and review the portfolio over time.

Another option is a managed portfolio service (MPS), where a professional fund manager builds and runs portfolios using a range of funds, including multi-asset funds.

The economy may be entering a period of recovery and growth but the outlook is still uncertain. Making sure your portfolio remains well diversified as economic conditions develop is a key part of investing, and something a professional financial adviser can help you with.

The basics of investing apply at all stages of the economic cycle

P. 5About Investing. Investing through the global economic cycle.

Important InformationThis material is for information only and does not constitute an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested.Opinions expressed within this document, if any, are current opinions as at 29 April 2021 and do not constitute investment or any other advice; the views are subject to change and do not necessarily reflect the views of Santander Asset Management as a whole or any part thereof.Santander Asset Management UK Limited (Company Registration No. SC106669) is registered in Scotland at 287 St Vincent Street, Glasgow G2 5NB, United Kingdom. Authorised and regulated by the Financial Conduct Authority (FCA). FCA registered number 122491. You can check this on the Financial Services Register by visiting the FCA’s website www.fca.org.uk/register. Santander and the flame logo are registered trademarks.

Let’s be clear!Investment terms explained

Asset class: A group of investments with similar traits. shares, bonds, property, cash and alternatives are all examples of asset classes.

Bonds: A bond is a loan issued by a government or a company. When you buy a bond, the issuer promises to pay a certain amount of income until the bond redeems and is repaid by the issuer. The strength of that promise varies by the issuer of the bond. This is known as creditworthiness.

Diversification: Spreading your money across different investments to help manage risk.

Portfolio: a group of investments that are managed together to meet a particular objective.

Shares (often referred to as equities or stocks): In investing, this is a share of ownership in a company. Investing in a fund gives exposure to underlying share prices without investors actually owning the shares themselves.