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.
Equity Snapshot
| United States | • | US equities started February positively, supported by a swift recovery in fourth-quarter corporate earnings, signs of an easing in COVID-19 infections, and expectations of a massive US fiscal stimulus. By mid-month, the large-cap S&P 500 Index, the tech-heavy Nasdaq Index and the smaller-company focused Russell 2000 Index had risen to fresh highs. However, US stocks retreated in the second half of February as the sell-off in the US bond market picked up speed. Richly-valued growth stocks, in particular, were hit by the rise in bond yields, which lowered the present value of their future earnings, while out-of-favour value stocks performed far better. Smaller companies also delivered solid gains over the month, further extending their year-to-date outperformance of large-cap stocks, which rose modestly overall. |
| • | Federal Reserve (Fed) chair Jay Powell downplayed concerns over inflation and reiterated that the Fed would continue with its monetary support for the foreseeable future. | |
| Europe | • | European equities advanced modestly (in EUR terms) over February. While much of the continent remained under strict measures to control the spread of COVID-19, sentiment was lifted by hopes that the rollout of vaccines would lead to a rebound in economic growth in the second half of 2021. Italy was one of the strongest markets in the region, as Mario Draghi, a well-respected former president of the European Central Bank, agreed to form a unity government. At a sector level, banks in particular benefitted from the rise in long-dated bond yields, with energy companies also boosted by rising oil prices. |
| • | The euro-zone economy contracted by 0.7% over the fourth quarter of 2020, leaving overall economic output 6.8% lower than at the start of the year. So far in 2021, manufacturing remains a bright spot, with the flash estimate of the IHS Markit purchasing managers’ index rising to 57.7 in February. However, services sector activity fell to a three-month low of 44.7 as lockdowns and curfews impacted hospitality businesses. Of more concern, euro-zone inflation surged to 0.9% on a year-on-year basis in January. This was the highest level in 11 months and ended five months of falling prices. The increase was partly due to a reversal of a temporary reduction in German VAT, but also reflects higher energy costs, producer input and shipping prices. | |
| Asia | • | Equity markets in Asia closed February with modestly positive returns. However, after advancing over the first half of the month, stocks reversed direction in the second half of February, as sentiment, particularly towards technology companies, was undermined by a sharp rise in global bond yields. Chinese equities hit new highs after the Lunar New Year but retreated to close the month with small losses, amid concerns that policy support might be curtailed given China’s rapid recovery from the COVID-19 pandemic. Hong Kong equities initially surged, as they continued to benefit from strong inflows from mainland Chinese investors, but later partly relinquished these gains when the territory imposed its first hike in trading tax since 1993. Taiwan exported a record amount in January, fuelled by rising demand for computer chips, and by companies rushing to get components ahead of the Lunar New Year holidays in February. South Korea’s jobless rate surged to its highest in more than two decades, raising concern that an export-driven recovery could be masking a harsher scarring of the economy. Elsewhere in the region, ASEAN delivered modest gains. Indonesia was one of the strongest ASEAN markets. The country’s central bank cut interest rates by 25 basis points to 3.5%. Thailand’s gross domestic product shrank 4.2% from a year ago, the National Economic and Social Development Council said Monday, improving from the prior quarter’s 6.4% contraction and better than the median estimate of a 5.4% contraction. |
| Bond | • | February was a generally poor month for bonds, as yields rose due to significant re-pricing in monetary policy expectations on the back of higher economic growth and inflation expectations. The rising longer-dated government bond yields further accelerated in February, as the 10-year US Treasury yield briefly topped 1.6%, the highest level since early 2020, whilst the 30-year bond yield breached 2.3%, a level last seen in 2019. With short-term bond yields pegged by the accommodative monetary policy, the yield curve further steepened to its highest level since 2017. The 10-year breakeven rate broke 2.2% for the first time since mid-2018, as the market is concerned over inflationary pressure on the recovery path since recent monthly inflation data from major economies were better than expected. US Fed chair Jay Powell downplayed concerns over inflation and reiterated that the US Fed would continue with its monetary support for the foreseeable future. Economic news was generally solid. Fourth-quarter GDP data for 2020 was revised marginally higher to an annualised rate of 4.1%, from an initial estimate of 4.0%, and non-farm payrolls increased once more in January. Surveys conducted by the Institute of Supply Managers for the manufacturing and non-manufacturing sectors showed solid expansion in January. Also of note, retail sales surged 5.3% in January, the strongest monthly increase in six months, helped by the distribution of stimulus payments to individuals. Meanwhile, headline consumer prices rose 0.3% over the month of January, taking the year-on-year increase to 1.4%. |
| • | Euro-zone bonds sold off over February, joining in the global bond retreat amid rising reflationary concerns. The sell-off took the 10-year German Bund yield as high as -0.2%, compared to less than -0.5% at the end of January. Peripheral euro-zone bond yields rose by a similar amount, apart from Italy where ex-ECB president Mario Draghi’s appointment as prime minister of a unity government was well received. As a result, Italian bond yields rose less than other euro-zone markets, as political risks lessened. The euro-zone economy contracted by 0.7% over the fourth quarter of 2020, leaving overall economic output 6.8% smaller than at the start of the year. Of more concern, euro-zone inflation surged to 0.9% on a year-on-year basis in January. This was the highest level in 11 months and ended five months of falling prices. The increase was partly due to a reversal of a temporary reduction in German VAT, but also reflects higher energy costs, producer inputs and shipping prices. | |
| • | UK bonds sold off sharply, underperforming euro-zone bonds as the chances of the Bank of England implementing negative interest rates were seen to decrease. The 10-year UK Gilt yield breached 0.8%, a rise of around 50 bps over the month, and the largest monthly sell-off since 2016. The UK economy proved stronger than many had feared in the fourth quarter of 2020, expanding 1.0% overall, although this still leaves UK’s output 9.9% lower than at the start of the year. | |
| Outlook | • | 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. |
| • | Expectations are undoubtedly high. In the US, manufacturing PMI (purchasing manager index) data reached 60.8 – its highest level since 2018. In the UK, positive vaccine news has pushed the pound sterling to its highest level against the US dollar in three years. Japanese 10-year government bonds traded as high as 0.18%, their highest level since the Bank of Japan introduced negative interest rates in early 2016. | |
| • | At a stock level, this should continue to benefit the cyclical names that languished throughout 2020. However, the level of such exuberance after last year’s contraction is prompting fears that central banks will implement higher interest rates to cool economies that have grown too hot, too fast. As a consequence, valuations in high growth names, as well as bond proxies, such as consumer staples and utilities, are pulling back. | |
| • | Yet, this rapid recovery scenario is by no means certain. There is still the potential for vaccine rollouts, economic activity and subsequent earnings growth to all fall short of current expectations. Likewise, central banks – most notably the US Federal Reserve – have made clear that they are willing to look through short-term jumps in inflation in order to avoid destabilising the broader economy. | |
| • | Equity markets, therefore, are adjusting to incorporate uncertainty. However, we remain committed to our principles of investing in quality growth companies for the long term. This is allowing us to take advantage of some interesting valuation opportunities. | |
| • | Companies with outstanding track records that are being unfairly punished for a lack of cyclical exposure (such as Nestlé) are presenting attractive opportunities to initiate or increase positions. Equally, steady compounders more closely tied to economic cycles, such as Fleetcor, have reached multiples that provide a substantial margin of safety and substantial upside potential in even a gradual reopening of the global economy. In the event of further volatility, this disciplined, active approach should continue to serve us, and our clients, well. |
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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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March Issue 2021
20/04/2021
Summary
Global equity markets continue to run with the reflation narrative. Led by the US, strong GDP and PMI numbers are boosting earnings expectations across the board, with more cyclical service sectors are catching up with their manufacturing counterparts.