The V-shaped recovery looks to be here at last

By the end of last year we were convinced that the UK would see a stunning pent-up demand-driven V-shaped recovery. We encouraged you to look at end-of-pandemic value stocks in November as the vaccine came good. And by December we were subjecting you to excitable “Roaring Twenties” cover stories. Then came the UK’s second lockdown. “So much for that,” you might have thought. But there is good news. As usual, it turns out we were less wrong than early.

Five months on, the V is here. A few weeks ago, the consensus GDP growth forecast for the UK this year was 5.5%. Not any more: Berenberg has their forecast at 6.7% and Goldman Sachs have just revised theirs up to 7.8%. The CBI is telling the same story – reporting sharp upturns in sales as the UK reopens – and UK-listed companies across the board are seeing hugely positive momentum (even BP is reporting happy results).

The same holds in the US. S&P500 companies “are in great shape”, says Ed Yardeni of Yardeni Research. Forecast revenues, earnings and profit margins – all of which are pretty good indicators of what actual revenues, earnings and margins will be – “rose to record highs” last week. More firms are revising forecasts up than down. This is the opposite of the recovery after the global financial crisis (GFC), which was marked by relentless disappointment rather than regular surprises.

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All this is impressive, but the most impressive bit of all is surely the profit-margin data. The insane levels of fiscal and monetary stimulus we have seen over the last year (four times the stimulus offered in the global financial crisis to cover less than one quarter of the economic loss, says BlackRock) have obviously helped out with demand. But to keep margins rising in the face of rising costs (of shipping, labour and commodities – see page 5 for more on the “new oil”) suggests that they have managed to boost the productivity of their existing workforce. After years of stagnating productivity numbers in the West, that is excellent news. It might even be enough to justify keeping the bull market going a little longer.

None of this means there is nothing to worry about. Domestically, we have our wallpaper wars and in Scotland the terrifying (or hugely amusing – it depends where you live) prospect of having Nicola Sturgeon and Alex Salmond sitting in Holyrood at the same time.

Globally, there is India’s Covid-19 nightmare a whole host of geopolitical tensions, the usual supply-chain worries (a genuine shortage of chips worldwide), the build up of public debt and Joe Biden’s tax plans. Not everyone is keen on the US president’s idea of doubling capital gains and dividend taxes on well-off Americans, particularly on top of more regulation.

Still, most of these things (poor India aside) are intangibles for now, as Bill Blain says in his MorningPorridge blog. Focus on what is actually happening now and you see a lot of good news. If you want to invest in the building blocks of long-term growth in the UK (still one of the cheaper markets) try micro caps . But wherever you invest at the moment watch out for the genuine bubbles (yes, we are talking electric vehicle companies). There’s a difference between being an optimistic investor and being the greater fool. We aim to be the former.