Why Government Bonds, Gold, and Tech Stocks are Down

Freddy Lim
Freddy Lim

Co-founder and CIO

25 March 2021

25 March 2021

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We break down what's behind the market drops: from inflation fears and a tech crackdown, to how COVID-19 will shift the market sectors. 

There’s been a lot of movement across financial markets in recent months. Central banks and governments introduced massive stimulus packages and government bonds are down; some investors think that these developments signal impending inflation. But Gold is also down when it’s supposed to go up with rising inflation, signalling just the opposite of inflation. Elsewhere in the stock market, the technology sector has also been volatile.

Government bond markets anticipate additional bond supply

Likely due to President Biden’s recent monetary stimulus policies, investors are concerned that the recent sell-off in bonds signals impending inflation. Some investors fear that inflation, which reduces the purchasing power of the dollar, will eat into their returns, making their bonds less valuable. This fear explains why they’d sell their bonds in the first place.

Yes, bonds have declined in previous months, with long-dated US government bonds having the steepest declines: 10- to 20-year, and >20-year US government bonds reported returns of -15.5% and -17.9% over the last 6 months, respectively.

But Gold, which is sensitive to interest rates, also declined with a 6-month return of -13.1%, indicating that there’s no inflation. The price of Gold is generally inversely related to the value of the US dollar: inflation causes the US dollar to fall in value, which increases the demand for Gold. Demand for Gold, in turn, increases its value.

COVID-19 has disrupted supply chains, and this has caused some symptoms of inflation, such as increased prices: According to the Food and Agriculture Organization Food Price Index published by the United Nations, prices have increased by 27.5% between May 2020 and March 2021. This price increase is short-lived and will lift when industries adjust their supply chains and production processes as the pandemic eases off.

So, bonds are declining, and we know it’s not because of inflation, given what’s happening with Gold. Bond prices are declining because the bond market is pricing in the future increases in government bond supply. These future bonds will pay for monetary stimulus policies. From what we know so far, the government will issue $1.9 trillion USD in new COVID relief packages, $1.5 trillion USD of clean energy reforms, and at least $1 trillion USD in infrastructure spending.

Tech companies face regulatory and post-pandemic challenges

The bond market isn’t the only one experiencing changes. Although the technology sector emerged as the clear winner in the pandemic, it’s now facing regulatory challenges in the US and China and may fall behind other rising sectors once the pandemic lifts. 

Recent events have brought several firms under scrutiny. Section 230 of the Communications Decency Act of 1996 has protected US technology companies from being held liable for the content their users post. But after Facebook and Twitter’s failures to curb misinformation and hate speech, Trump’s posts on election fraud which fuelled the 6 January Capitol insurrection, and Reddit’s role in GameStop’s stock surge at the hands of retail investors, there are now calls to revise the law.

This revision would slow down the tech industry: it would force companies to hire scores of content moderators, develop new content moderation tools, and lean on news brands for quality content - ultimately setting the standard for tech companies globally.

And outside the US, China is also ramping up its antitrust measures to rein in its technology champions such as Alibaba and Tencent.  

These developments have caused the Disruptive Technology, US Technology, and the China Innovations funds to fall by -18.3%, -2% and -15.1% over the last month, respectively. Despite these short-term setbacks, the respective funds maintained positive YTD returns of +2.8%, +4.5%, and +13.1%.

Technology could face yet another challenge: as governments roll out COVID-19 vaccinations, previously beaten-down sectors such as REITs, hotels, and airlines could stand up again. So, these sectors may rotate as borders reopen, and in fact, there’s already evidence of this change. Year-to-date to 17 March, value and small-cap stocks in the US outperformed the broader S&P 500 index by 4.9% and 3.2%, respectively. 

A Snapshot of Movements Across Markets: Technology Stocks, Long-Dated US Government Bonds, and Gold Decline in Recent Months (SGD terms*, as of 17 March 2021)

March 2021 CIO Insights: A snapshot of movements across markets: Technology stocks, long-dated US government bonds, and Gold decline in recent months.
Source: StashAway, Bloomberg. 
(Note: Insights from the table don’t change whether we represent returns in SGD, MYR, THB or USD terms. Periodic returns of assets and StashAway portfolios are inclusive of expense ratios.)
*All figures will be provided in MYR terms in future CIO Insights.

What investors can do to navigate uncertainty

You can’t predict the markets, just like how no one could’ve predicted a global pandemic and a tech crackdown. But what you can do is diversify your portfolio across asset classes, including protective assets like Gold and bonds among riskier trades like cryptocurrencies; and sectors like technology and travel. This practice insures your investments against economic and market events like inflation and sector rotations, controls volatility, and keeps you invested for the long term. Long term investing ultimately grows your portfolio with compounded returns.

If you’re investing with StashAway, your portfolios already consider all of the above; they’re diversified and optimised for economic uncertainty with our All-Weather strategy. And, we’ll continue to optimise your portfolio based on your risk profile and time horizon, and whenever there’s a significant shift in economic indicators such as inflation and growth. The outcome of this approach is reflected in our consistent annualised returns over the different time horizons below.

StashAway annualised rates of return (SGD terms, as of 17 March 2021)

March 2021 CIO Insights: StashAway annualised rates of return (SGD terms, as of 17 March 2021)

Source: StashAway, Bloomberg 
Figures are inclusive of ETF expense ratios and before StashAway’s management fees.

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