It has been a difficult start to the year for the UK economy. COVID-19 lockdown restrictions and the end of the Brexit transition period reduced trade between the UK and EU by 42% in January (Source: ONS), as firms on both sides of the channel struggled with new trading rules and restrictions. Although we have since seen a partial recovery, trade between the UK and EU remains below last year's levels.
Throughout Q1 2021, bond yields in the UK and the rest of the world increased, driven by:
A greater confidence in the global economy as COVID-19 restrictions eased;
Joe Biden’s significant fiscal stimulus to help the US economy and spend on infrastructure and green economy; and
Concerns around inflation.
The Bank of England Monetary Policy Committee (MPC) in its meeting on 5 May 2021 observed that the outlook for the economy, and particularly the relative movement in demand and supply during the recovery from the pandemic, remains unusually uncertain.
The minutes stated that “In the central projections of the MPC’s May Report, the economy experiences a temporary period of strong GDP growth and a temporary period of modestly above-target CPI inflation, after which growth and inflation fall back, with inflation around the target two and three years ahead.”
The MPC states that it “will continue to monitor the situation closely and will take whatever action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”.
MetLife investment portfolios used with our Secure Income and Secure Capital options are broadly based on a mixture of actively or passively managed asset classes. These are:
UK & International Equities
Equity returns over the past 30 years have been strong, but their volatility has been high, with three periods where the market, as measured by the MSCI ACWI Index, fell in excess of 30% (Source Financial Times).
The use of gilts, corporate bonds and cash provide our funds with balance as historically the correlation between stocks and bonds has been that when stocks have fallen, bonds have typically risen. However, these historical relationships are under stress in today’s low, or in some cases negative, interest rate world.
Future market volatility remains uncertain, particularly if monetary and fiscal accommodation wanes, inflation gradually rises, political instability continues and concerns over new variants of COVID-19 persist.
Bond yields remain close to historic lows, and some issuers, e.g. Japan and the European Central Bank even issuing bonds with negative yields.
However, Q1 2021 has seen increases in longer-term yields that has resulted in a decrease in the value (unit prices) of bond funds or the value of bonds assets held within a multi-asset fund.
Interest rate risk, the potential for investment losses to be incurred as a result of changes in interest rates, can affect many investments, but impact the value of bond and other fixed-income investments most directly. In simple terms, market interest rates and bond prices generally move in opposite directions.
The tables below show the performance of the main MetLife pension funds during the Q1 2021 period of increasing yields, along with the several ABI indices that are shown for comparison purposes. More detailed fund performance information is available from our fund factsheets.