If 2020 held twists and turns for global financial markets, 2021 has not disappointed so far either.
Despite the global recession and unemployment soaring, world stock markets ended 2020 up 13%, with indexes such as the S&P 500 reaching new highs. As we push into the new year, certain sectors and regions have retained their leading edge, buoyed by changing habits and recovery.
However, there are fears in some quarters that with stimulus-supported markets recovering far quicker than the real economy that sits below it, there could be bubbles appearing — and bubbles often only end one way.
We examine where the markets are buoyant, and where investors need to take care.
Listen to the latest Digest & Invest Podcast to hear eToro Market Analyst Henry Ward discuss what’s been happening with the China A50, Nasdaq and FTSE 100.
China equity markets out in front
China stocks climbed at the start of February, helped by easing concerns about tight liquidity conditions and falling cases of new coronavirus infections.
Both the CS CSI300 index and Shanghai Composite Index showed gains as the month began. Additionally, the FTSE China A50 Index, which measures the performance of the 50 largest companies on the Shanghai and Shenzhen stock exchanges by total market cap, continued to plod upwards.
In such a broad index, there are leaders and laggards. Over the past year, logistics company SF Holdings has led the gainers, rising by a whopping 176.77%, to the end of January, followed closely behind by alcoholic beverage producer Wuliangye Yibin at 167.85%.
While other large economies are struggling to contain second waves of the Covid-19 pandemic, China is on the road to recovery. Its economy is expanding at a faster rate than before coronavirus, with GDP rising 6.5% in the fourth quarter.
However, it’s not all going to be plain sailing. Despite the election of President Joe Biden, it looks unlikely the US will backtrack on its decisions aimed to subdue the competing superpower’s ambitions.
The tone on China might have changed, but the views on some of its activities have not.
The decision in November to blacklist Chinese companies with military connections has forced index providers such as MSCI, FTSE Russell and S&P Dow Jones to announce the removal of several Chinese companies from their indices. US financial regulators are also taking a keener approach to vetting who lists on the country’s exchanges.
How will this impact the progress of China towards overtaking the US as a superpower? Watch this space.
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Nasdaq bubble forming?
Over the past year, the Nasdaq Composite Index has surged, reaching a record high at the end of January. The technology heavy composite had a glorious 2020, up nearly 45%, and the gains have continued into this year.
Although it is impossible to predict when, or even if, a stock market correction will occur, some analysts believe one could be around the corner.
While Wall Street has continued to soar, fuelled by bets on a global vaccine roll out and the prospect of economic recovery under President Joe Biden, investors are starting to worry about the market being overvalued.
Tech stocks largely avoided the initial fallout from Covid-19. The shift to a digital-first world under lockdown created a surge in demand for big tech’s services, causing their stocks to rally.
However, Bank of America is warning that this “extreme rally” seen after the market crash last year formed a bubble that could be about to burst. Goldman Sachs also expects a correction in the near future.
Heading into 2021 it is hard not to see parallels between the technology sector and the dotcom boom. While we may be quite some way off that happening, the stock market performance of companies that are yet to make a significant profit highlights how investors are willing to ignore doubts about businesses in certain sectors.
Some analysts are predicting that the performance of tech stocks will weaken when restrictions loosen and other companies start to look more attractive because of increased economic growth.
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FTSE 100 falls
The FTSE 100 Index had a rough time last year, falling by 14.3%, its biggest drop since its 2008 slump of 31.3%.
The pandemic, a deep recession and Brexit all hit the blue chip index hard. It continued to lag other major international stock indices throughout 2020, mainly due to its heavy weighting towards the shares of companies impacted by the pandemic, such as energy and travel.
Yet it managed to recover well once the uncertainty around trade relations and the EU was removed. But after a strong start to 2021 sparked by optimism of a swift economic recovery following vaccine rollouts, the FTSE 100 has been on a steady decline ever since.
In the last week of January, the FTSE 100 slid into the red, thanks (mainly) to a row with the EU over vaccine supply.
With progress finally being made and AstraZeneca now set to supply more doses of its vaccine to the EU, the bloc also pledged controls will not hit UK supplies.
The whole ordeal highlights how the EU now views the UK as a rival and competitor and while everything has calmed down for now, the vaccine spat could be the first of many between the UK and the former stable mate. This could spell more volatility for the FTSE 100, which could bring opportunity for investors with it.
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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.