2021 could see “repeat of taper tantrum” for markets, says Beaufort Investment

Markets could be impacted by a repeat of the “taper tantrum” of 2013 this year, as the recovery from the pandemic takes hold and prompts expectations of higher rates, Beaufort Investment’s CIO has said.

While central banks have continued to make supportive noises around both interest rates and the extraordinary support they have provided to markets, as the spectre of inflation returns there could yet be a moment in markets when investors panic.

Shane Balkham, chief investment officer at Beaufort Investment, says he expects to see such an event this year, even though support from central banks to economies and markets will not be scaled back.

“The supportive stance from policymakers will likely remain in place until the vaccines have paved a way to some return to normality,” he said.

“However, there will be a risk of another ‘taper tantrum’ similar to the one we witnessed in 2013, and this is our main focus for 2021.

“This is where the market’s expectations of interest rates being raised by central banks begins sooner than had otherwise been anticipated, which could lead to a sell-off in the equity markets. Whether it is as severe as the one in 2013 where we saw was a fall of 10% in Sterling, is uncertain.”

Balkham said the year was likely to be characterised in two distinct parts, with the first six months being driven by the progress of vaccines around the world – with the risk of shocks and setbacks – and the second being about confidence and economic growth returning and economies looking to the future.

“Our base case is the first half of the year being focused on the double-edged sword of restrictions and vaccinations. A successful six months would mean a more meaningful economic boost and certainty that once opened, industries and sectors would not have to close again,” he said.

“The second half will see us engage more with the task of bringing economies back to their pre-COVID-19 levels. This will be a long and slow process, taking us well into 2022 and perhaps beyond for some countries.”

Balkham said the best strategy to invest against such an uncertain backdrop, with multiple risks, was to stay diversified.

“Our focus has always been on diversification and how the underlying asset classes have changed and adapted over time,” he said. “We remain vigilant to the threats that political surprises can produce, highlighted by the scenes in Washington and that Brexit will still have wrinkles to be ironed out.

“However, we are equally open to the opportunities that an inoculated world could deliver, and investors must have a long-term investment horizon and not be distracted by the inevitable short-term noise.”