August Issue 2021
Summary
This past August was a contradiction for equity markets. On the one hand, stocks made modest gains with little to change forward expectations from the previous month. Set against this, the Fed is ramping up its tapering expectations, China’s economy is visibly slowing and the Delta variant of Covid-19 continues to spread rapidly.
Equity Snapshot
| United States | • | US equities rallied moderately over August. In the closing days of the month, the S&P 500 Index reached a fresh peak that marked a doubling in value since its March 2020 low, although small-cap stocks remained below their all-time peak in March 2021. Buoyant corporate earnings boosted US stocks, with FactSet reporting that 86% of companies have exceeded earnings forecasts. Sentiment was also lifted by news that the Senate had passed a USD 1-trillion infrastructure bill targeting the rebuilding of traditional transportation infrastructure, improving rural access to broadband internet, and upgrading the electric grid and water systems. |
| • | Speculation grew that the Federal Reserve would soon announce it was starting to taper its USD 120 billion per month asset-purchase programme. Minutes of the latest FOMC meeting revealed that the majority of US policymakers were prepared to begin dialling back the central bank’s massive stimulus measures. In a speech at the Jackson Hole meeting of central bankers Fed Chair, Jay Powell, provided reassurance, indicating that the central bank is likely to begin tapering its monthly bond purchases before the end of the year; although, he highlighted the dangers of doing so too quickly. | |
| Europe | • | European equities continued to advance over August (in EUR terms), with the EuroStoxx 600 Index closing the month near a record high. Strong corporate earnings lifted sentiment with FactSet reporting that the percentage of European companies that beat analysts’ earnings estimates hit a five-year high in the second quarter. Rising vaccination rates across the euro zone also helped to offset worries about the impact of the Delta variant. At a sector level, technology companies led the advance, with communication services and utilities also posting solid gains. Meanwhile, consumer-facing sectors weakened slightly. |
| • | Euro-zone inflation surged to a year-on-year rate of 3.0% in August, according to a preliminary estimate, compared to 2.2% in July and 1.9% in June, and was the highest level since November 2011. This was well above the European Central Bank’s (ECB) new target of 2%. Core inflation, which excludes volatile food, energy and fuel prices, jumped to an annual rate of 1.6% compared to 0.7% in July. Nevertheless, there were a few signs that ECB policymakers were about to change their supportive stance and consider tapering their asset purchases, although some member states, including Germany, raised concerns that guidance on the future path of policy understates the risk of rising inflation. Consumer prices in Germany rose at a year-on-year rate of 3.4% in August, a 13-year high. | |
| Asia | • | Equity markets in Asia ended August with mixed returns. Chinese stocks were flat. Widespread flooding and new COVID-19 outbreaks exacerbated concerns that economic activity was slowing. Ongoing uncertainty over China’s regulatory environment also weighed on sentiment. On the other hand, Indian equities reached record highs after Prime Modi announced a national infrastructure plan to generate jobs and shore up the economy. Most ASEAN markets also rallied strongly, as rising vaccination levels and falling infection rates helped them recover from July’s sell-off. Elsewhere, South Korea equities weakened slightly. As the central bank acted to contain record household debt and rocketing property prices, South Korea became the first large Asian economy to raise interest rates since the start of the pandemic. Taiwanese equities rose but it was a volatile month pending expiry of a day-trading tax incentive, which was initiated in 2017 to boost market turnover. |
| Bond | • | US bonds retreated as yields moved modestly higher over August. The yield on the 10-year Treasury bond rose as high as 1.37% before closing the month around 1.31%: this compares to a yield of just above 1.2% at the end of July. Economic news was generally positive, although there were some concerns that the economic rebound may have peaked. Euro-zone bonds sold off in August. Yields initially moved lower, however, euro-zone bonds later relinquished these gains amid a general rise in global bond yields towards the month end. UK gilts also retreated over August. Euro-zone inflation surged to a year-on-year rate of 3.0% in August, the highest level since November 2011. This was well above the European Central Bank’s (ECB) new target of 2%. There were few signs that ECB policymakers were about to change their supportive stance and consider tapering their asset purchases, although some member states, including Germany, raised concerns that guidance on the future path of policy understates the risk of rising inflation. |
| Outlook | • | This past August was a contradiction for equity markets. On the one hand, stocks made modest gains with little to change forward expectations from the previous month. Set against this, the Fed is ramping up its tapering expectations, China’s economy is visibly slowing and the Delta variant of Covid-19 continues to spread rapidly. |
| • | Covid-19’s ebb and flow continues to be a driving force for equity markets, albeit with an increasingly regional split. In developed markets, the UK’s relative resilience to the Delta variant is setting an example, with US inflation expectations directly mirroring UK hospital admissions. So far, a high vaccination rate and sustained economic reopening has kept the outlook positive, if slightly less than enthusiastic. | |
| • | Conversely, the variant’s rapid spread in China has introduced additional volatility into an already turbulent market. China – and other emerging markets – has both lower inoculation rates and a lower capacity to operate socially distanced economies. This has been a trigger for the Chinese government to ease monetary conditions and for state-owned media to post supportive comments for mainland equities. Perhaps counterintuitively, the pandemic’s return may signal an end to intensive regulatory crackdowns and a return to a more supportive environment. | |
| • | The tone for monetary policy remains similarly supportive elsewhere. Despite Fed Chair Powell’s comments to expect tapering later this year, US equities continue to reach all-time highs. Indeed, the passing of Joe Biden’s 1 trillion USD infrastructure package only adds fiscal ammunition to the arsenal. Labour shortages, supply chain disruptions and cost inflation will thus remain the most significant factors in company results. Ensuring portfolio holdings have the management, product offerings and pricing power to offset these concerns long-term remains a priority in all our investment portfolios. | |
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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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September Issue 2021
Summary
The sharp “growth”-“value” rotation which began at the end of 2020 was characterised by share price rallies in stocks whose earnings had been decimated by the pandemic, such as those in the aerospace, travel and leisure sectors. By June, the Delta variant and earnings consistency of pandemic winners had largely reversed this. The present rotation is driven less by expectations of recovery and growth, but a combination of constricted energy supply, inflation fears and rising bond yields.