Market snapshot: investors still caught in two minds

Tech stocks are back in fashion and UK shares are higher Monday. Our head of markets analyses the mood as the working week begins.

Tech stocks are again flavour of the month as investors shun economically sensitive sectors in the wake of new Covid concerns.

The rotation follows proposed lockdowns in parts of Europe and, with the US also unable as yet to reduce the vestiges of the pandemic to a comfortable level, cyclical stocks have been eschewed. Airlines, banks and energy stocks have felt the force of renewed pandemic portfolios, with the latter also under pressure from a falling oil price. 

As such, technology companies have regained their day in the sun, not only because of their previous performance at the height of Covid- 19, but also because they are seen as being better equipped to weather the current economic stutters which have blighted a full recovery. The Nasdaq closed at another record high, as the more cyclical Dow Jones index bore the brunt of the switch.

Even so, each of the main indices are so far in for a strong performance during 2021, as the progress of the recovery has outweighed the numerous concerns overshadowing the market, such as inflation, and with the consumer showing resilience. In the year to date, the Dow Jones is now ahead by 16.3%, the S&P500 by 25% and the Nasdaq by 24.6%.

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Inevitably, similar themes are playing out in the UK, with some of the proposed lockdowns in Europe being uncomfortably close to home. Airline and leisure stocks have returned to the eye of the storm, as Austria and potentially Germany resort to reimposing lockdowns.

There also remains some debate as to the fate of interest rates in December. Despite a strong retail sales figure in the UK last week, previous inflation and employment data implied that the Bank of England may have reinforced its intention to hike. However, subsequent comments from the Governor threw the likelihood of such a decision into further doubt as he focused on the persistence of inflation rather than the current elevated level.

Investors had previously questioned the efficacy of a hike in the current environment and this cynicism is unlikely to have altered. It remains to be seen whether the Bank heeds these concerns in December or whether it forges ahead with a marginal rate rise.

In the meantime, there is some return of risk appetite in Monday's early exchanges, with the likes of the banks, airlines and leisure stocks recouping some of last week’s falls, again underlining the fact that investors are still caught in two minds given the current backdrop. Even so, the premier index has a skewed exposure to economically sensitive sectors and the proliferation of oil, mining and banking stocks will continue to provide a drag until a full and sustainable economic recovery comes into view in the UK.

Nonetheless, the main indices continue to attract the eye of international investors on valuation grounds and, in the year to date, the FTSE100 has added 11.8% and the FTSE250 14.7%, underperforming many of its developed market peers, yet being boosted in terms of total returns by a recovering dividend yield which tends to set the UK apart.

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