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.
Equity Snapshot
| United States | • | US equities lost ground in September, recording their worst monthly performance since the start of the pandemic in March 2020. Sentiment was knocked by concerns over elevated valuations, possible tax increases and the crisis at Chinese homebuilder Evergrande, as well as worries about how stocks would respond to an eventual tightening in monetary policy. Domestic political tensions also ramped up. Whilst Congress passed a temporary measure to keep the federal government funded until early December, moderate and progressive Democrats remain at odds over two key pillars of President Joe Biden’s legislative agenda: the USD 1 trillion infrastructure bill and a USD 3.5 trillion investment in America’s social safety net. Federal Reserve (Fed) chair Jay Powell signalled that the US central bank could start withdrawing its massive stimulus programme as early as November this year. In addition, minutes of the Fed’s latest rate-setting meeting revealed that half of Federal Open Market Committee officials expected the first post-pandemic rate rise to take place in 2022, a higher proportion than when projections were last published in June. |
| Europe | • | European equities retreated in September (in EUR terms) with sentiment pressured by fears of higher inflation, slower growth and a potential default from Chinese homebuilder Evergrande, the effects of which would be felt well beyond China itself. Most sectors fell, with energy stocks a rare bright spot. In contrast, utility companies declined the most as Spain’s move to tax the windfall profits of electricity companies that have benefited from soaring gas prices sparked fears that other governments could follow suit. The European Central Bank (ECB) decided to slow the pace of its bond-buyin programme, although ECB president Christine Lagarde insisted this was a trimming, not a tapering. Despite inflation reaching 3.0% in August, the highest level in a decade, the ECB does not appear to be considering raising interest rates. In contrast. Norway’s central bank became the first major western central bank to increase interest rates after the pandemic and indicated that more interest rate rises would likely follow. |
| Asia | • | Equity markets in Asia ended September with mixed returns. Sentiment was knocked by developments in China, with further regulatory crackdowns, energy shortages and the threat of default at a major property developer all causing concerns. This led to a decline in Chinese equities, while stocks in Hong Kong got dragged lower by weak returns from real estate and Macau casino stocks, which fell on fears that Chinese regulators might move to tighten controls on casino operators. Taiwanese electronic component makers with factories in China came under pressure due to energy shortage concerns. In South Korea, the Kospi ended September with the largest monthly decline since March 2020, led by a broad sell-off in technology shares. Indian equities climbed higher, led by a rally in retail and travel stocks. Elsewhere in ASEAN, Indonesia was the strongest market, while Singapore and the Philippines also eked out slight gains. |
| Bond | • | US bonds sold off as investors reacted to the prospect of higher interest rates. In the 10-year part of the curve, the yield on the benchmark Treasury bond increased by just over 20 basis points over the month. Yields rose the most in the five- to 10-year part of the curve, while the upward movement in yields was more modest for ultra-long and shorter-dated bonds. Federal Reserve (Fed) chair Jay Powell signalled the US central bank could start withdrawing its massive stimulus programme as early as November this year and a greater number of US policymakers predicted that rates would rise in 2022. Euro-zone bonds fell in September. The yield on the 10-year German Bund climbed back above -0.2%, its highest level since early July, following a series of hawkish statements from central banks. The European Central Bank (ECB) decided to slow the pace of its bond-buying programme, although ECB president Christine Lagarde insisted this was a trimming, not a tapering. Norway’s central bank became the first major western central bank to increase interest rates after the pandemic and indicated that more interest rate rises would likely follow. |
| Outlook | • | 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. |
| • | Central bankers continue to reassure investors that the current bout of inflationary pressures is transitory. There are some good reasons to agree with this view. The pandemic has created huge disruption across global supply chains, the effects of which are being felt now as economies around the world reopen. With the passage of time, these bottlenecks and supply constraints should eventually work themselves out, thereby reducing current inflationary pressures. | |
| • | However, the pandemic has exposed certain vulnerabilities in global supply chains. Rising energy costs also reflect, in part, an historic underinvestment into new sources of supply. Resolving these – by reshoring labour, building out domestic manufacturing or increasing renewable capacity – will increase the likelihood of some higher costs and, therefore, prices longer-term. | |
| • | In China, the situation is more complex. Valuations have de-rated, but risks related to financial stability and regulation have also risen. As stock pickers, we don’t make allocations on a sector or country basis, opting instead to examine every investment opportunity case by case. Some companies with exposure to China have been able to harness superior growth thanks to – amongst other things – its rapidly growing middle class, digital infrastructure and ecommerce. Our task is to assess these growth prospects, the risk profiles, and the extent to which this is reflected in share prices. | |
| • | The coming months are likely to see elevated levels of volatility as investors seek to price in a shifting and uncertain global economic outlook. Over the long-term, we believe holding a balanced portfolio of companies with diversified revenue sources, with reasonable valuations and strong recurring cash flows is the best means of delivering outperformance. Above all, pricing power, rather than exposure to certain sectors, is the best means of offsetting inflationary pricing pressures. Whilst challenging, it is important to remember that periods of turbulence can create opportunities for bottom-up active managers as valuations and fundamentals diverge. | |
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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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October Issue 2021
Summary
Strong earnings throughout October have helped quell the previous month’s relative volatility. Successful companies have either benefited directly from the economic reopening, and/or sustained the advantages which saw them through the tough times.