We’re now halfway through the year, and it’s been a good six months for stock market investors, with the FTSE 100 returning 11% and the S&P 500 returning 14% in pounds and pence.

But the real standout performer has been the UK Smaller Companies market, which has returned around 20% in the past six months alone.

So far this year the FTSE Small Cap index has repeatedly set new record highs, and now sits around 20% higher than pre-pandemic levels.

The smaller companies market does have a greater exposure to domestic revenues than the big blue chip index, so this is partly a vote of confidence in the UK economy, but also a sign of investors positioning themselves for a risk-on market.

At the other end of the spectrum, bond funds have had a pretty grisly year so far, as vaccine optimism and inflationary fears have led to a sell-off in safe haven assets.

Bonds can still offer portfolio diversification, but it’s hard to maintain a hugely positive outlook on the asset class, given such low yields and a global economy that looks like it’s beginning to take off.

While inflationary fears have surfaced, they have not yet really taken root, otherwise the UK 10-year gilt (UK government bond) would not be yielding a meagre 0.7%.

If inflation does prove more than transitory, we can therefore expect further selloffs in bonds, particularly at the longer dated end of the market. Should that happen, it would be a shock to bond investors who have enjoyed a long bull market, and who generally invest in these assets because they’re risk averse.

OLD MEETS NEW ECONOMY

Looking at stocks within the   FTSE 100, the top end of the performance table carries a distinct whiff of the old economy, with names like Royal Mail (RMG), BT (BT.A), and Ladbrokes owner Entain (ENT) evoking aromas of a bygone era.

However, while communications, logistics and gambling are longstanding industries, these markets have moved with the times.

Royal Mail derives much of its revenues from delivering parcels ordered by consumers online, BT owns the mobile network EE, and Entain derives most of its revenues from online betting and gaming.

The business lines may be old, but that doesn’t mean they can’t benefit from new trends.

The bottom end of the FTSE 100 performance table is a bit of a mishmash of lockdown winners that have come off the boil, and more cyclical names that have failed to ignite demand, despite hopes for a global economic recovery.

POPULAR STOCKS

In terms of what DIY investors have been buying, the most popular shares bought on the AJ Bell Youinvest platform in the past six months showcase a number of investment trends which we’ve witnessed this year.

At the fizzier end of proceedings, Argo Blockchain (ARB) has been used by  investors to get access to cryptocurrency, and US-listed Gamestop was the epicentre of the meme investing craze.

But purchases of stocks like British Airways owner International Consolidated Airlines (IAG), banking group Lloyds (LLOY) and engineer Rolls Royce (RR.) show investors also continue to seek out bargains amongst the UK’s value stocks.

Growth orientated funds still dominate the leaderboard of most popular funds, with offerings from Baillie Gifford continuing to attract investment.

But there are a couple of signs of a tentative shift in investor preferences, with demand for Jupiter UK Special Situations (B4KL9F8) and Blackrock World Mining Trust (BRWM) suggesting some investors are positioning themselves in more cyclical areas, in preparation for an economic recovery, and perhaps inflation.

These are in the minority though, and in large part fund investors are still backing secular growth over economic reflation.

DISCLAIMER: AJ Bell referenced in this article is the owner and publisher of Shares magazine. Daniel Coatsworth who edited this article owns shares in
AJ Bell, Smithson and units in Fundsmith Equity.

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