January Issue 2021
31/01/2021
Summary
Highly efficient Covid-19 vaccines are being rolled out in many countries, and other promising jabs are in the process of being approved. Nevertheless, it is still unclear how quickly and sustainably the economy will recover. The equity markets are already anticipating an upswing to some extent.
Equity Snapshot
| United States | • | After a strong start to the month which took major indices to fresh highs, US stocks closed January slightly down. News that Democrats had won both seats in Georgia’s run-off Senate elections sparked an early rally as the victory gives the Democrat party control of both houses. With Joe Biden promising USD 1.9 trillion in additional fiscal stimulus, the ‘blue wave’ gained further traction: value outperformed growth and small-cap stocks outpaced larger companies. After his inauguration, the new President swiftly overturned several of his predecessor’s policies, including re-joining the Paris climate accord and halting the US withdrawal from the World Health Organization. Nevertheless, US stocks ended the month on a weak note as new virus mutations added to concerns over the slow pace of the vaccine rollout and Republican objections to the planned stimulus package. Sentiment was also undermined by a sharp rise in volatility in the final days of the month as retail investors clubbed together to boost the returns of stocks that had been shorted by professional investors. |
| • | Despite concerns that additional stimulus measures would stoke inflation, the Federal Reserve reiterated that it would maintain its bond-buying programme and interest rates would not be raised until the US economy had reached full employment and inflation had achieved its 2% target for some time. New Treasury Secretary, Janet Yellen, reinforced the case for large-scale stimulus measures, saying that “with interest rates at historic lows, the smartest thing we can do is act big”. | |
| Europe | • | After an initial rally, European equities closed January on a weak note, recording modestly negative returns overall (in EUR terms). Sentiment was affected by the sluggish pace of inoculations within the EU, with disappointment over vaccine supply adding to concerns. Additionally, many countries tightened lockdown restrictions to counter new, more virulent virus mutations in the UK, Brazil and South Africa. |
| • | In economic news, several euro-zone countries reported relatively resilient GDP numbers for the fourth quarter: Spain’s GDP unexpectedly grew 0.4% while the contraction in French GDP was less than had been forecast. However, the flash estimate of the IHS Markit composite Purchasing Managers’ Index slid 1.6 points to 47.5 in January as renewed lockdowns weighed on Services sector activities. In contrast, while the pace of expansion in the Manufacturing sector slowed, overall, the sector delivered the seventh consecutive month of growth. Retail sales revealed the impact of lockdowns, falling 6.1% in November, the steepest monthly fall since the pandemic-induced slump in the spring of 2020. Meanwhile, euro-zone inflation fell by 0.3% on an annual basis in December, marking the fifth consecutive month of deflation. | |
| Asia | • | Equity markets in Asia started January on a strong footing, underpinned by the new US administration’s plans for further massive fiscal support and positive economic data out of China. China and Hong Kong equities soared as China’s GDP expanded by a stronger-than-expected 6.5% in the fourth quarter of 2020, taking growth over the whole year to 2.3%. Taiwan and South Korea stood out among the region’s more developed markets, with companies associated with the semiconductor supply chain particularly strong. While GDP in South Korea shrank 1% last year, GDP growth in Taiwan outpaced that of China for the first time in 30 years. Elsewhere in the region, ASEAN markets were mixed, but generally lagged their more developed counterparts. Singapore advanced modestly. Thailand remained flat, with its Covid-19 taskforce approving a loosening of restrictions to resume school and business. Indonesian stocks fell after virus restrictions were extended in Jakarta and the country’s finance minister flagged risks to the economic recovery due to the worsening COVID-19 outbreak. The Philippines was the worst regional performer. GDP data showed the Philippine economy shrank by a worse-than-expected 8.3% in the fourth quarter of 2020. |
| Bond | • | In January, 10-year US Treasury yields continued an upward trend from December 2020 as the market speculated additional US stimulus would feed into higher inflation. 10-year US Treasury yield touched a 10-month high of 1.17% before closing January just below 1.1%. With short-term bond yields pegged by near-zero interest rates, the yield curve continued to steepen as longer-dated bond yields rose. However, while nominal Treasuries fell, Treasury Inflation-Protected Securities rose modestly as rising inflation expectations pushed the 10-year breakeven rate above 2% for the first time since late 2018. Despite concerns that additional stimulus measures would stoke inflation, the Federal Reserve reiterated that it would maintain its bond-buying programme and interest rates would not be raised until the US economy had reached full employment and inflation had achieved its 2% target for some time. New Treasury Secretary Janet Yellen reinforced the case to “act big” by pushing large-scale stimulus measures. On the economic front, the US economy expanded by an annualised 4% in the fourth quarter of 2020, slowing from a record 33.4% expansion in the third quarter, as the continued rise in COVID-19 cases and restrictions on activity moderated consumer spending. Over 2020 as a whole, US GDP contracted by 3.5%, the worst performance since 1946, although there are signs that the economy is proving to be more resilient than many had feared. More worryingly, non-farm payrolls fell 140,000 in December, much weaker than the expected rise of 71,000. This marks the first monthly decline since the pandemic-related slump in April 2020. |
| • | Eurozone government bond yield also rose slightly over January but lagged the upward movement in US Treasury yields as demand for low-risk assets was underpinned by the sluggish pace of inoculations within the EU, with disappointment over vaccine supply adding to concerns. Additionally, many countries tightened lockdown restrictions to counter new, more infectious virus mutations in the UK, Brazil and South Africa. The 10-year German Bund yield traded in a narrow range for much of the month. Italian bonds underperformed as the country experienced some political uncertainty following the collapse of Giuseppe Conte’s coalition. On the economic front, several eurozone countries reported relatively resilient GDP numbers for the fourth quarter; Spain’s GDP unexpectedly grew 0.4% while the contraction in French GDP was less than expected. However, the flash estimate of the IHS Markit composite purchasing managers’ index slid to 47.5 in January as renewed lockdowns weighed on activity in the services sector. In contrast, while the pace of expansion in the manufacturing sector slowed, overall, the sector delivered the seventh consecutive month of growth. Retail sales revealed the impact of lockdowns, falling 6.1% in November which was the steepest monthly fall since the pandemic-induced slump in the spring of 2020. Meanwhile, eurozone inflation fell by 0.3% on an annual basis in December, marking the fifth consecutive month of deflation. | |
| Outlook | • | Highly efficient Covid-19 vaccines are being rolled out in many countries, and other promising jabs are in the process of being approved. Nevertheless, it is still unclear how quickly and sustainably the economy will recover. The equity markets are already anticipating an upswing to some extent. In fact, some investors may have become a bit reckless. Still, the major global central banks will continue their generous liquidity provision. Their negative rate policy may even “encourage” investors to shift money from investments perceived as safe (such as government bonds) to riskier assets such as equities. Overall, we expect the equity market uptrend to broaden. With the environment remaining uncertain, however, investors should continue to focus on stock picking. A number of regions, sectors and companies should be able to benefit from the distribution of Covid-19 vaccines. |
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Sources: 1 Eurostat 2 Bloomberg 3 Office for National Statistics
Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice.
No offer or solicitation to buy or sell securities, nor investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Past performance is not indicative of future performance.
This material has not been reviewed by the SFC in Hong Kong and is published for information only.
Issued by Allianz Global Investors Asia Pacific Limited.
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February Issue 2021
24/03/2021
Summary
The last week of February saw a new development in global equity markets. Expectations of a global, vaccine-led economic recovery, and a USD 1.9 trillion stimulus package in the United States, combined to stoke fears of excessive inflation, forcing investors to countenance the possibility of higher interest rates.