December Issue 2021
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.
Equity Snapshot
| United States | • | It was a volatile month for US equities. Stocks whipsawed as investors reacted to the prospect of tighter US monetary policy and weighed up the impact of the highly contagious Omicron variant on economic recovery. |
| • | In addition, US growth prospects were dealt a blow by doubts that President Joe Biden’s flagship Build Back Better bill would be unable to garner sufficient support in its current form. Nevertheless, the S&P 500 Index overcame these concerns to touch a fresh high in the closing days of December, outperforming the tech-heavy Nasdaq Composite Index, as richly valued new technology stocks, such as Tesla, Amazon and Netflix, fell from favour. | |
| • | The Federal Reserve (Fed) pledged to double the rate at which it tapers its USD 120 billion monthly bond-buying programme. The programme is now scheduled to end in March 2022, rather than June 2022 as originally planned. Additionally, Fed officials forecast that interest rates may be raised as many as three times in 2022, with the first increase coming as early as March. Nevertheless, Fed chair Jay Powell expressed optimism over the growth outlook, indicating that, whilst the Omicron variant was a risk, it did not change the decision to accelerate tapering. | |
| Europe | • | European equities delivered solid gains in December, with France, Italy and the UK closing near their highest levels of the year. European equities overcame fears over the impact of the highly contagious Omicron variant as research appeared to show that the new variant caused less severe symptoms. However, as new infection rates soared across the continent, restrictions were tightened, with the Netherlands imposing a one-month lockdown to curtail the spread of the virus. |
| • | In economic news, the flash estimate of the euro-zone composite Purchasing Managers’ Index fell to a nine-month low of 53.4 in December. Services sector activity slumped to its lowest level since April, reflecting a sharp contraction in tourism and recreation due to rising COVID-19 infection rates and tighter restrictions. In contrast, manufacturing activity eased only marginally and there were tentative signs that supply chain restraints may be moderating. | |
| • | The European Central bank took steps to tackle rising inflationary pressures, deciding to scale back its bond-purchase programme by March 2022, although it indicated that interest rates were unlikely to rise until at least 2023. Outside of the euro zone, Norway joined the UK in raising interest rates. | |
| Asia | • | Equity markets in Asia advanced modestly in December, but remained nervous given concerns over a hawkish policy pivot by major global central banks, as well as the possibility of further supply chain disruptions given the rapid spread of the new COVID-19 variant. While many markets in the region rose, Chinese stocks declined. Sentiment was knocked by growing signs that the slowdown in China’s economy was accelerating, ongoing problems with some big real estate developers in China, and a COVID-19 outbreak in the city of Xi’an that led to the lockdown of 13 million people. Among the region’s more developed markets, South Korea and Taiwan rallied, helped by gains in semiconductor companies. Elsewhere, Hong Kong stocks ended with flat returns. ASEAN markets were mixed. Thai, Malaysian and Indonesian stocks advanced but stocks in the Philippines and Singapore retreated. |
| Bond | • | US bonds sold off in December owing to the Federal Reserve’s pivot to a more hawkish stance. The yield on the two-year note moved above 0.7%, its highest level since the start of the pandemic. Long-dated bond yields, including the 10-year and 30-year Treasury yields, also rallied and closed the year at 1.5% and 1.9%, respectively. Adding to the bullish bias for the yields could be the downbeat US data and firmer inflation expectations, as November CPI inflation in the US was 6.8% year-on-year, the third consecutive rise prior to release. |
| • | European bonds also declined over the month of December, as major central banks took steps to wind down their pandemic-related stimulus measures. The UK and Norway raised interest rates, while the European Central Bank decided to scale back its bond-purchase programme by March 2022. The yield on the 10-year German Bund rose to above -0.2% from -0.35% over the month. Italian bond yields rose even more, with the 10-year bond yield approaching 1.2%, from 0.97% last month. | |
| Outlook | • | The first weeks of 2022 brought another sharp rotation into Value stocks. |
| • | 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. Despite this, there continue to be opportunities for our invested companies, driven through reinvestment of their exceptional earnings. Accordingly, we will remain true to our quality growth style and bottom-up approach. | |
| • | Therefore, strong investment decisions need to factor in much more than monetary policy moves. Fortunately, we see significant discrepancies between the market’s short-term sentiment and our longer-term views. The market has been selling off whole sub-sectors, such as payments and lab-related healthcare as examples, with little discrimination between individual companies. Our team has, therefore, been very active recently, with volatile markets typically being alpha gathering opportunities for our strategies. | |
| • | With respect to multiple compression, we would highlight that Valuation is the third pillar of our strategy (along with structural Growth and Quality). We frequently trim our positions due to valuation issues. This does not fully insulate us from short-term valuation swings due to market sentiment, but we believe it does control our risk over the relevant, multi-year horizons in which we make decisions. | |
| • | The recent correction is not driven by long term worsening fundamentals, but rather short-term flows in reaction to reopening and inflation. We remain confident that, long-term, our invested companies are well positioned to handle uncertain and unpredictable environments successfully. | |
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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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January Issue 2022
Summary
After a period of festive excess, January typically encourages sober reflection and a focus on the year ahead. Global equity markets have fully embraced this in 2022, pulling back 4.9%. Sustained inflation is driving central banks to tighten monetary policy at the same time as some companies are managing down near-term growth expectations.