Inflation is the canary in the coalmine for investors

There is plenty of optimism around for 2021, despite the latest headlines about the resurgence of the Covid-19 virus in Europe and the US. 

Investors look forward to the roll out of vaccines and expect major economies to remove many of the restrictions on social contacts and travel later this year. They confidently expect central banks and governments to keep boosting economic activity, with ultra-low interest rates, plenty of money creation and substantial government borrowing. 

Investors are not ignoring the advent of faster-spreading variants of the virus and the leap in cases in the northern winter that has forced governments on both sides of the Atlantic to impose more lockdowns. But they are looking beyond the immediate future to recovery ahead.

2021 is billed as the year of build back better, the post-pandemic government-led investment programmes planned in the US, the EU and UK. Many states and large companies intend to turn general green promises into action to cut carbon in the next few months.

This is not going to be an easy or V-shaped recovery. It will be another year of tensions between the US and China, with the EU drawn more into supporting the US. Russia will continue as a disrupter, consolidating her influence in the Middle East and in eastern European satellite countries. Meanwhile, fierce competitive battles are intensifying in the business world, as digital champions fight to keep the extraordinary market share gains made during lockdowns, and resist government demands for more tax and greater regulatory control.

The FT fund, with its roughly 50/50 balance of shares and bonds, had a good year in 2020, ending with a return of 12 per cent at a time when the UK and European share indices fell during the 12 months. The main US index was up by 15 per cent. Bonds provided positive single figure returns. 

The fund achieved this by concentrating its shares on the digital and green revolutions, backing Nasdaq-listed stocks and themed global index funds. These positions have performed so well it was tempting to take profits and do something else. I did sell out some, diverting money into the general world index to have more exposure to broad economic recovery as well as tech. I am sticking with the exposure to the electric energy transformation and internet expansion. 

This year is likely again to see a big gap between the gains in winning sectors, and the weaker performance of industries punished by Covid-19 and the impact of the green revolution.

Some hospitality and travel businesses will have a lot of debt to manage. They may need to recapitalise and, in some cases, may not revive. The longer the latest Covid wave lingers the more businesses will suffer.

Others will benefit from…