The rapid roll out of vaccinations, beating expectations in a number of countries, is bringing normalisation closer. Even mainland Europe, after some early failures, is back on track with its vaccination targets. This is setting up economies for re-opening.
PMI data confirms that there is a bounce back in demand and services sector figures are catching up with manufacturing numbers. With unprecedented fiscal packages in motion in the US and Europe, consumer savings at record levels and so-called ‘revenge buying’ very much in peoples’ minds, we could be ushering in a period of strong economic and earnings growth.
Of course, there are exceptions. There are still areas of rising Covid cases in Asia and associated mobility restrictions, most notably in India and Japan. The vaccine drive is not uniform across countries, with many developing countries still to access supplies in suitable scale. China’s economy is showing signs of decelerating despite record quarterly growth, which could signal the balance of global growth shifting towards the US.
Despite some early stumbling in May, markets could continue higher in the near term, but this belies the significant sectoral and style rotations underway. The inflation question will also continue to lurk in the background through the summer.
Ned Salter Global Head of Investment Research
The Equities Outlook provides an overview of our investment team’s views and positioning in each of the key markets. Each of our portfolio managers has discretion over the positioning and holdings of their portfolios, and, as a result, there may at times be differences between strategies applied within a fund and the views shared in this document.
New highs again
The S&P 500 posted another all-time high towards the end of April and is up 11.3% in the first four months of the year. Over the same period the Nasdaq is higher by 7.5% and the Russell 2000 14.7%. The VIX index, measuring volatility in the S&P 500, reached a one year low, treading close to 16.
After a bumper first quarter of US$ 251 billion in IPOs, secondary listings, SPAC launches and block issues, April saw little supply and the market drifted higher into earnings season. As of the end of April, 61% of S&P 500 firms have reported earnings and 69% of those beat consensus estimates by more than one standard deviation, the highest rate since 1998, and 57% surpassed sales expectations, the highest ever.
As we enter May, share repurchases could be the incremental buyers. Buyback authorisations have surged 86% this year and are near 2015 highs. Tech firms continue to lead on repurchases, with Apple and Google alone announcing US$140 billion in buybacks - for context, 444 companies in the S&P 500 have market valuations below this figure.
European earnings delivering
In Europe, the Eurostoxx 600 rose 1.8% in April and we saw one of the best runs of consecutive weekly returns since 2018 end after seven weeks. Growth stocks regained some leadership closing up 5% compared to flat value stocks. Interest rate expectations continue to dictate these rotations.
First quarter earnings are delivering, and the trajectory remains in an upgrade cycle. Results tracked so far indicate a record net beats (49%) since 2007 with financials posting the broadest positive surprises.
Earnings misses have so far been punished more than beats rewarded but this isn’t a surprise given many stocks are trading at record highs and earnings revisions had reset higher going into the season.
European flows inflect
Volumes were lighter in Europe than elsewhere and it is the only region where they are down compared to last year. But for investors this could count in Europe’s favour. Investors are underweight Europe, yet the highest weekly inflows since the start of the year were registered during the last two weeks of April. This demand is starting from a low base, given prior to mid-April, there were net outflows and European flows lag other regions. European valuations are also still relatively low compared and while US re-opening stocks have blasted through their highs, European equivalents have not.
Asia boosted by earnings
The Asia market environment was supported by Chinese companies posting strong quarterly earnings, more stable pandemic conditions with further easing of restrictions, and a consumption recovery around the China Labor Day holiday period. However, regulatory tightening by China of online platforms continue to weigh on the internet giants and the Huarong bond default risk triggered a sell-off in the banking sector.
Hong Kong was largely range-bound in April, with the Hang Seng edging up by 1.2%. After two consecutive months of declines, the MSCI China rose 2.7%, but underperformed the MSCI World and EM indices. So far, earnings have been positive, with 47% beating estimates, while 32% missed and 21% were in line.
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