Market Insights, May 10, 2021

Each week, our Investment team shares its market views with you.

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US jobs figures were surprisingly weak in April. Economists had been expecting a million new jobs, but only 218,000 were created, and the unemployment rate edged back up to 6.1%. These data contrast with economic indicators, which continue to point in the right direction. But these jobs figures may still be revised upwards, and it’s too early to say that the labour market is stagnating.

China’s services PMI continued to improve, coming in at 56.3 in April. Data collected during the 1 May ‘golden’ holiday week confirmed that demand is indeed picking up again: although the country isn’t expected to open its borders until 2022, domestic tourism is back at pre-pandemic levels.

Unsurprisingly, the SNP won Scotland’s parliamentary elections. Another independence referendum does not seem imminent, however, since the SNP fell short of a majority and Boris Johnson is against the idea. The pound was buoyed by this news, but there will continue to be political uncertainty in the medium term.

Central bankers are starting to leave the playing field

Things are starting to move among central bankers. A few weeks ago, almost all of the world’s central banks had their monetary stimulus going at full throttle, with the notable exception of China, whose economy picked up earlier than most. After many long months of either partial or total lockdown, their aim is still to support the economic recovery, even if that means letting inflation rise temporarily.

But with the vaccine rollout going very well in developed countries, economic indicators improving spectacularly and some bottlenecks emerging in the supply chains of certain materials and components, there are some concerns that economies might be overheating.

Three weeks ago, the Bank of Canada was the first to announce that it would begin normalising monetary policy. And last week, the Bank of England took the same step. In these two cases, raising key rates was not on the cards, with interest rates likely to remain at rock bottom for some time to come. But these central banks think it’s now time to start tapering the massive liquidity injections they’ve been making into their economies and financial systems for more than a year.

Tapering doesn’t mean stopping the process altogether – the Bank of England, for instance, will cut its weekly purchases by GBP 1 billion, to GBP 3.4 billion. The UK and Canadian central banks are sending out a signal with this very slight change of course.

The public health crisis will soon be behind us – at least in the developed world – so it’s time to start getting ready for monetary policy to return to normal and for the end of cheap money. We can expect other central banks to follow suit in the months ahead. The annual Jackson Hole meeting of central bankers at the end of August may well mark the end of the emergency measures and the start of a new monetary policy cycle throughout the world. Until then, investors will be paying close attention to the meetings and statements of the two central banks with the biggest influence on the financial markets: the US Federal Reserve and the European Central Bank.

A low-carbon economy – a 30-year in-vestment horizon

President Joe Biden recently doubled the US 2030 target for cutting greenhouse gas emissions. Unlike the pressure put on tech giants in the US and China, the latest measures announced by governments around the world are actually good for companies that are helping to tackle climate change. At the same time, sustainable funds continue to attract investors. They experienced record inflows of EUR 120 billion in Q1 2021, an 18% rise, with these vehicles accounting for close to half of total investment fund inflows in Europe.

So why has this investment theme underperformed the global stock market index recently? This can largely be put down to the sector rotation brought about by the rise in US interest rates, since sustainable portfolios are not exposed to cyclical sectors such as financials and energy.

This underperformance weighed on investors’ optimism but also created new entry points into this theme. The transition to a low-carbon economy is still one of the most tangible structural trends, and it is boosted by the fact that there is good visibility about the regulatory support that  will be available over the next 30 years, given the pledges and targets that governments have made for 2050.

And it’s worth noting that the climate is one of the rare topics that the USA and China can agree on. However, the recent volatility has highlighted the need for diversification. Ensuring a portfolio is exposed to various low-carbon solutions will help investors to avoid excessive optimism and short-term bubbles – such as those seen recently on some wind and hydrogen stocks – and allow them to keep investing in this theme through all stages of the business cycle.


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