October Issue 2021
22/11/2021
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.
Equity Snapshot
| United States | • | Following their worst monthly performance since the start of the pandemic, US equities rebounded in October, posting their strongest monthly returns so far in 2021. The rally was driven by stronger-than-expected company profits, helping the S&P 500 Index touch a fresh high at month-end. |
| • | According to FactSet, of the companies in the S&P 500 Index that have reported third-quarter earnings to date, more than 80% have beaten forecasts. There were also tentative signs of progress in President Joe Biden’s social infrastructure plans, which seek to plough federal investment into childcare, education, health care and to fight climate change; the bill has so far been bogged down in negotiations as it has failed to garner sufficient cross-party support. | |
| • | The Federal Reserve’s (Fed) Beige Book assessment of economic conditions indicated that the US economy’s rebound from the pandemic-related shock had slowed, given supply chain problems, worker shortages and the continued spread of the virus. Minutes from the latest Federal Open Market Committee meeting signalled that policymakers are likely to announce a tapering in the Fed’s massive bond-buying programme as early as November. | |
| Europe | • | European equities delivered solid gains during October (in EUR terms), erasing all September’s losses. Despite concerns about soaring commodity prices and supply-chain bottlenecks driving higher inflation, shares were lifted by optimism over the third-quarter earnings season. |
| • | Utilities companies led the advance, helped by news that Spain had rolled back plans to tax the windfall profits of energy companies. Technology and consumer discretionary stocks also posted strong gains. In contrast, the communication services and real estate sectors retreated over the month. | |
| • | Against this backdrop, the European Central Bank (ECB) remained dovish, although minutes of its September policy meeting revealed that some members argued that it is underestimating future inflation. | |
| • | At its October meeting, the ECB left its monetary policy unchanged, along with its rate hike outlook, reaffirming its pledge to moderately readjust its pandemic-era asset purchasing programme. ECB president Christine Lagarde said that inflation was likely to remain high for longer than initially expected, though she still predicted it would fall below the central bank’s 2% target by 2023. | |
| Asia | • | Equity markets in Asia rose modestly over October. Looser pandemic-related restrictions in several countries buoyed optimism over a brighter economic outlook, although inflation worries continued given rising energy prices and supply chain bottlenecks. After several months of weak returns, Chinese stocks advanced amid hopes that the Chinese government’s regulatory crackdown may have passed its peak. Hong Kong stocks also benefitted from the improved sentiment. In Taiwan, gains were led by technology companies with strong third-quarter earnings and revenues. South Korean equities declined, with manufacturing PMI and customs exports falling unexpectedly during the month. Elsewhere, ASEAN markets outperformed developed markets in the region. Indonesia was the strongest market for the second month in a row, with energy companies boosted by record coal prices. |
| Bond | • | The US bond yield curve flattened as shorter-dated yields moved upwards amidst growing speculation that persistent inflation might bring forward the Federal Reserve’s decision to raise rates earlier than its official projections. |
| • | Yields on two-year bonds breached 0.5%, their highest level since March 2020. In contrast, the yield on the 10-year Treasury bond closed the month with a relatively smaller increase from its level at the end of September, whereas the yield on the 30-year bond trended lower. | |
| • | Euro-zone bonds fell in October. The yield on the 10-year German Bund moved back towards -0.1%, its highest level since May, as investors anticipated that the rise in inflation will be longer lasting than initially expected and force the European Central Bank to raise rates in 2022. | |
| Outlook | • | 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. As a result, margins across the US, Europe and Japan have expanded; in some instances, to record levels. Post-pandemic base effects are naturally moderating growth expectations for quarters to come, but the impact of higher input prices may temper these still further. |
| • | Inflationary pressures are indeed persistent. OPEC’s steadfast refusal to pump additional oil is keeping prices buoyant. A shortage of labour, as well as lost manufacturing capacity continue to create supply-chain bottlenecks. In the US, ISM’s manufacturing survey of prices paid is at its highest level in over ten years, hand in hand with new highs for average length of time to deliver. Yet there are signs these higher prices are already self-correcting. Lumber prices, for example, are down over 60% from their May high. | |
| • | Central banks are thus balancing the need to raise rates (and therefore the cost of debt) with the possibility that the pace of economic growth may have already peaked. Recent announcements from both the Fed and the Bank of England (BoE) have tended towards dovishness. While the Fed is now tapering off its bond purchases, monetary policy remains highly supportive of equity markets. The BoE refrained from raising rates, wrong-footing rate-sensitive stocks like banks, but boosting names with longer-term growth trajectories. Markets still expect tightening to take place, but having put it off so long, some investors fear the possibility of a forced overcorrection. | |
| • | This is particularly the case, given longer-term inflationary pressures. COP26 has highlighted the need for cross-sector investment in the transition to net-zero emissions. This will require action from both governments and companies, to develop renewable energies and build up stock and infrastructure. More immediately, Pfizer has joined Merck in developing a pill to alleviate the symptoms of Covid-19, further reinvigorating the economic reopening narrative. However, deflationary trends, such as globalisation, digitalisation and ecommerce, may yet produce lower headline inflation numbers, which mask substantial underlying change. | |
| • | Against these shifting macroeconomic forces, our focus on quality companies generating strong earnings growth remains steadfast. Names like TSMC have, in fact, continued to raise their revenue and earnings guidance on the back of strong underlying demand. However, stocks like Assa Abloy, which is facing some short-term headwind on rising costs, are confident in their ability to pass costs on to customers over the long-term. Sense-checking this resilience and doubling down on high-conviction names is at the heart of our active approach. | |
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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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November Issue 2021
20/12/2021
Summary
December market outlooks are given to prognostication. Yet for as long as Covid-19 continues to dictate global events, the predictive value of such an endeavour is even more questionable than usual.