April Issue 2022
24/05/2022
Summary
Inflation and subsequent central bank rate hikes continue to be this year’s single biggest driver of equity markets. This can partly be ascribed to Russia’s invasion of Ukraine, which has driven up the prices of energy, corn, wheat and a range of industrial commodities.
Equity Snapshot
| United States | • | It was another weak month for US equities, with sentiment knocked by disappointing results from several high-profile ‘new technology’ companies. The S&P 500 Index approached a one-year low, while the tech-heavy Nasdaq fell to its lowest level since late-2020 amid fears over the impact of higher rates and lower growth on company profits. The S&P 500 Index has now fallen more than 10% since its peak at the start of 2022, placing it firmly in correction territory, while the Nasdaq’s more than 20% decline means it is now in a technical bear market. Despite the downbeat tone, around 80% of S&P 500 companies that have reported first-quarter results to date have topped expectations, according to FactSet. |
| • | The minutes of March’s Federal Open Market Committee (FOMC) meeting, at which US policymakers raised interest rates for the first time since 2018, revealed officials’ willingness to tighten policy aggressively to combat inflation. The Federal Reserve (Fed) accelerated plans for quantitative tightening and Fed chair Jay Powell indicated that a 50-basis-point increase was “on the table” in May. Other FOMC members indicated that a 75-basis-point hike could well be seen in 2022. The market now expects the federal funds rate to end the year at 2.8%, compared to a current range of 0.25% to 0.5%. | |
| Europe | • | European equities lost ground in April as investors started to anticipate that the European Central Bank was moving closer to raising rates. The French presidential election also caused some uncertainty but, in the end, Emmanuel Macron secured another five years in office after beating Marine Le Pen by a significant margin. |
| • | The euro-zone economy grew 0.2% in the first quarter of 2022. However, the flash estimate of the S&P Global euro-zone composite purchasing managers’ index (PMI) unexpectedly strengthened in April, with service sector activity rising to an eight-month high as pandemic-related restrictions were eased, while manufacturing activity held steady. However, inflation continued to accelerate, with the annual headline rate touching an all-time high of 7.5% in April and the core rate reaching 3.5%. The European Central Bank (ECB) stuck to its earlier guidance of a speedier withdrawal of its stimulus measures, but ECB president Christine Lagarde admitted that the first euro-zone rate rise in more than a decade was possible from July. | |
| Asia | • | Equity markets in Asia were broadly down in April. China equities were sold off as the prospect of widening lockdowns dampened the outlook for economic growth. China’s strict zero-Covid policy led to factory closures and closed key ports, sparking fears of further supply chain disruptions. Consumer spending also slumped. Elsewhere in the region, markets such as Australia, South Korea and New Zealand were generally weak amid a rising interest rate environment and inflation fears. Taiwan equities were also weak as the semiconductor industry continued to suffer from China factory closures and weaker semiconductor demand forecasts. Within ASEAN, Indonesia and Malaysia ended the month positive due to higher export commodity prices. |
| Bond | • | Global bond yields rose sharply as central banks took a more hawkish stance. The 10-year US Treasury yield approached 3.0%, its highest level since late-2018, while the equivalent dated German Bund came within touching distance of 1.0% for the first time since mid-2015. The sell-off meant US real rates, as measured by the yield on the 10-year Treasury Inflation-Protected Security, rose to zero for the first time since the start of the pandemic, while the 10-year US breakeven rate briefly climbed above 3.0%, its highest level in more than two decades. Minutes from March’s Federal Open Market Committee (FOMC) meeting, in which US policymakers raised interest rates for the first time since 2018, revealed officials’ willingness to aggressively tighten monetary policy to combat inflation. The European Central Bank (ECB) stuck to its earlier stance of a speedier withdrawal of its stimulus measures, but ECB president Christine Lagarde admitted that the first euro-zone rate rise in more than a decade was possible from July. |
| Outlook | • | Inflation and subsequent central bank rate hikes continue to be this year’s single biggest driver of equity markets. This can partly be ascribed to Russia’s invasion of Ukraine, which has driven up the prices of energy, corn, wheat and a range of industrial commodities. However, inflationary forces pre-date the conflict, with structural supply shortages made worse by the pandemic. China’s continued zero-Covid approach is further exacerbating supply chain issues. Rising prices are, in turn, eroding corporate profitability, with company outlooks taking an increasingly conservative tone. Consumer demand is also likely to weaken, as discretionary spending is reallocated to costlier essentials. ‘Reopening luxuries’, such as holidays, dining out and entertainment, may prove more resilient as people seize the chance to indulge themselves for the first time in two years. Yet inflation will ultimately lead to slower economic growth, even before the belated tightening of monetary policy. Indeed, much of this year’s equity market malaise can be attributed to the Federal Reserve’s willingness to tighten monetary policy in the face of a global economy that is already slowing. The International Monetary Fund continues to revise downward its global growth expectations, down from 6.1% in 2021 to 3.6% in 2022 . In the US, the yield curve has already flattened. For as long as inflation continues to surprise to the upside, equity markets face the prospect of further turbulence. In this environment, fundamentals provide the best solace. Negative sentiment has indiscriminately compressed P/E multiples across the portfolio, such that the portfolio’s average P/E has grown much closer to that of the wider global equity market. Yet while we do favour companies with a high growth rate, we also look for strong cash returns in the here and now. In this regard, the underlying earnings expectations for portfolio companies remain far more robust. For example, Align – a maker of transparent orthodontics held in some global portfolios – is currently on a valuation last seen in 2020, when the company earned $4 a share. Yet today, Align makes over twice this. This tells us not only that our holdings are confident and can offset inflationary pressures, but also that their ability to do so is undervalued. What’s more, as the premiums on quality growth stocks continue to decline regardless of fundamentals, stocks on hitherto prohibitive valuations are becoming increasingly interesting. The past two years have been characterised by exceptional circumstances. Experience tells us that only by maintaining a sharp focus on our investment philosophy and approach are we able to navigate these uncertain times with conviction. |
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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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May Issue 2022
27/06/2022
Summary
Global equity markets continue to be unsettled. In addition to broader declines, May saw weaker-than-expected earnings from US consumer bellwethers, Target and Walmart. The news brought down shares across Consumer Staples, one of the few more-resilient sectors year-to-date.