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.
Equity Snapshot
| United States | • | US equities ratcheted higher for much of November, with robust corporate earnings growth and the Federal Reserve’s dovish tone regarding future rate rises helping to buoy the market. But sentiment reversed sharply in late November, and stocks lost their earlier gains, as the newly discovered Omicron variant fuelled concern that the economic recovery might be derailed if vaccines and treatments proved less efficacious against this strain of COVID-19. The Nasdaq Composite Index outperformed the S&P 500 Index as investors rotated back into technology stocks. |
| • | The Fed confirmed that it would start trimming its asset-purchase programme by USD 15 billion per month, putting it on track to finish all bond-buying stimuli by the middle of 2022. However, Fed chair Jay Powell insisted that it was too early to think about hiking US interest rates. President Joe Biden re-nominated Mr. Powell as Fed chair, reassuring investors that the US central bank would take the necessary steps to fend off soaring inflation. In late November, Mr. Powell signalled that he would support a quicker reduction of the US central bank’s monthly bond purchases, citing a “very strong” economy and “very high” inflation, although he did acknowledge the potential risk of Omicron to the economy. | |
| Europe | • | After advancing in the first half of November, European equities slumped in the second half of the month to close lower. Sentiment was initially lifted by robust corporate earnings and reassurance that the European Central Bank would stick with its accommodative policy stance. However, a sharp increase in COVID-19 infection rates across the European Union led many countries to tighten pandemic-related restrictions towards the end of November, with uncertainty over the impact of the new Omicron variant further contributing to the sell off. |
| • | In economic news, the flash estimate of November’s euro-zone composite purchasing managers’ index rebounded from October’s six-month low. While supply chain issues continued to weigh on manufacturing activity, service sector activity accelerated. However, higher inflation and rising COVID-19 cases weighed on EU consumer confidence, which fell to -8.2 in November, marking the first time in eight months that it has fallen below its pre-pandemic level. Inflation continued to accelerate, with an early estimate indicating that euro-zone consumer prices had risen 4.9% year-on-year in November, compared to a rate of 4.1% in October, increasing pressure on the European Central Bank to act. | |
| Asia | • | Equity markets in Asia retreated in November as the newly discovered Omicron variant raised fears that the global economic recovery may be derailed if vaccines and treatments proved less effective against this new strain of COVID-19. In contrast to developed economies where interest rates remained on hold and monetary policy continued to be accommodative, certain central banks in the region raised rates to counter rising inflation. In terms of country performance, China equities declined. The authorities have signalled that the crackdown on property developers may soon be eased and intervened to control rising fuel prices caused by energy shortages. Among the region’s more developed markets, Taiwan was the only market to deliver positive returns, helped by gains from its largest technology companies. Elsewhere markets generally retreated, with Hong Kong hit by a sharp sell-off in Macau-based casino operators. ASEAN markets were mixed. Philippine stocks advanced but stocks in Malaysia, Thailand and Singapore retreated. |
| Bond | • | US Treasuries rallied over November as fears that the newly discovered Omicron variant of COVID-19 towards the end of the month led a flight-to-quality. After reaching a peak of almost 1.7%, as October’s inflation data exceeded expectations, the yield on the 10-year US Treasury bond subsequently fell steeply and closed the month back below 1.5%. The yield curve flattened over the month with long term US Treasury yields declining, owing to slower growth while short-term yields increased as the market started to price in rate-hike expectations following the Fed’s announcement of its intent to taper bond purchases at the latest FOMC meeting. |
| • | European sovereign bonds rallied over November on the back of rising confidence that the European Central Bank would retain its accommodative policy stance. In addition, sharp increases in COVID-19 infection rates across the European Union caused many countries to tighten pandemic-related restrictions towards the end of November, fuelling market expectations that ECB may extend its quantitative easing. The yield on the 10-year German Bund fell from -0.1% to around -0.35% over the month. Divergence in monetary policy direction between the US and Euroland led to a sharp correction in the Euro. | |
| Outlook | • | 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. At the time of writing, governments, health care officials, investors and businesses alike are all grappling with the potential impact of a new Covid variant (Omicron) which, until two weeks ago, was unknown. |
| • | In the Global Growth team, we prefer to focus on companies rather than crystal balls. Moreover, our holdings are quality compounders harnessing structural growth forces like digitalisation and the global energy transition, to such that their intrinsic value should be less impacted by short-term macroeconomic changes. Thus, our outlook reflects the range of topics for which portfolio companies have told us they are preparing, as well as factors likely to shape portfolio construction and performance in the medium-term. | |
| • | The first is moderating growth. While cyclical exposure in our holdings tends to be low, companies like Novo Nordisk and Estée Lauder have seen revenues increase as global economies reopen. At the same time, reduced business travel, online rather than in-person purchases, and – where hedged – low input costs have all helped boost margins. Consequently, 2021 has seen some of the strongest quarters for corporate profitability on record. These will be difficult to lap going forward, even without potential new Covid-19 variants. | |
| • | Growth may also continue to be limited by supply chain issues. Initially due to the logistical complexity of restarting entire industries, interruptions are now prolonged by exogenous factors. In some regions, renewed Covid-19 infections have forced factories into hiatus, as with Adidas in Vietnam. Companies have also gone out of business at the same time as new investments were scaled back. This has famously impacted semiconductor names such as Microchip Technology, but also lies behind rising energy prices. After their furlough, workers too are either retiring or demanding higher wages, driving up costs in labour intensive companies like Nestlé. | |
| • | At a policy level, the US and China continue to hold the biggest sway. With Fed Chair Jerome Powell divesting the word ‘transitory’ from his vocabulary, some investors are fearful monetary policy will tighten just as companies face higher input costs and slower growth. At the same time, President Xi has used the past year to demonstrate that he is more concerned with ideology than capital markets and as such, investors in China should recalibrate their risk/reward calculations. | |
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Nonetheless, this challenging backdrop presents many opportunities for active investors. Companies like Intuit, LVMH and Adobe, with pricing power and genuinely differentiated offerings that tap into structural growth trends, continue to beat and raise earnings, despite cost pressures. Conversely, where short-term challenges are impacting entire sectors, our holdings have the robust balance sheets needed to absorb the impact and grow at the expense of peers. And, with valuations in both super high growth and deeply cyclical stocks reaching extremes over the past year, quality compounders of the type we favour, are increasingly attractive from a valuation perspective. More so than ever, our job as investors is to construct portfolios that can weather the storm and thrive in fairer conditions. | |
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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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December Issue 2021
28/01/2022
Summary
With energy and labour costs continuing to fuel inflation, global investors are reacting to the US Federal Reserve’s new-found zeal for tapering bond purchases and raising rates. The broader picture is further complicated by the latest Omicron Covid-19 variant, geopolitical tensions and persistent supply chain issues.