Recent monthly US core CPI and core PCE readings were their highest since the early 1990s and well above the Federal Reserve’s target rate. The concern is that the Fed will reduce liquidity support sooner than expected. The spike in inflation is likely to be transitory given the low base set during the lockdowns last year and as economies gradually normalise, but this is not to say that inflation cannot become more persistent later on. It’s important to track economic data points including non-farm payrolls, jobless claims, PMIs, inflation and yields, and all these feed into the other great tension at the moment in equity markets between cyclicals and growth stocks.
Broadly speaking, prints that confirm a hotter economy support cyclicals while undershoots support growth stocks. Central bank communications will also have to tread carefully to avoid spooking the markets. In addition, a global corporate tax floor, agreed in principle by G7 members, will disproportionately affect multinational growth companies.
Equity markets look ahead, and they are currently watching early 2022 when tapering is expected to start. If central bankers can get equity traders accustomed to the idea, there could be a relatively benign effect from a reduction in monetary support, but it’s a difficult balance. Stock pickers can protect themselves with companies that have the pricing power to withstand higher costs.
Toby Gibb
Global Head of Investment Directing, Equities
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.
Inflation debate intensifies amid a modest rise in the US equities
The S&P 500 was up a modest +0.6% in May and captured a new all-time high, while the Nasdaq fell 1.3% over the month. Better economic data including the highest US core CPI reading in around 30 years and good progress on the vaccination programme, with 40% of US adults now fully inoculated, enabled cyclicals to outperform secular growers by 7% and the broad value factor to outperform the growth factor by 5%. This did also intensify the debate around inflation and potential tapering from the Federal Reserve.
Progress on vaccinations in the US boost markets
IPO’s pulled amid volatility
The IPO market faced challenges from the volatility in markets during May. After reaching all-time highs in February, the Renaissance IPO ETF, which tracks a basket of the most liquid newly listed public companies in the US, sold off aggressively, declining 29% to its May low. A handful of planned floatations were postponed due to market conditions.
European macro data extending lead over US
Cyclicals and growth led strong gains in Europe over May. European macro data beat expectations and is outperforming the US with almost the widest differential we’ve seen in the last 5 years, making the investment case for Europe even more compelling.
Flash PMIs continued getting stronger supporting the re-opening rebound and lifting cyclicals. Global central bankers are also continuing to push back against inflationary risks, which resulted in yields falling somewhat and the rebound in growth from depressed levels versus value showed signs of slowing down.
The last week of May produced the largest weekly inflow into European equities since February 2018 with a pervading ‘buy the dip’ mentality particularly as the EU Recovery Fund nears ratification. UK names starting to see a lot of bid speculation with four deals totalling more than US$1 billion in the final week of May and in Germany a multi-billion euro real estate combination between two Dax 30 constituents.
Easing restrictions in Europe spark revival in services
Weakening US dollar offsets infections and inflation in Asia
The MSCI Asia-Pacific ex Japan index rose 1.2% in May, performing in-line with MSCI AC World. Faster than expected inflation data from the US at the start of the month hurt equities before a weakening US dollar helped drive a solid recovery. However, there was a drag on returns from a resurgence in Covid-19 infections in countries including Taiwan, Singapore, Thailand and Malaysia, a slow vaccine roll-out, and regulatory risks in China’s tech sector.
The commodities market played an outsized role in the performance of Hong Kong equities. Rising concerns over margin erosion from the spike in commodity prices and global inflation gave way to Chinese regulators stepping up efforts to curb soaring commodity prices. The Hang Seng ended the month gaining 1.5%.
In China, the unwinding of internet names was a key drag for the first half of the month, but this was offset later as excess liquidity was driven into equities as the government addressed commodity prices and cracked down on cryptocurrencies, and the Yuan rose sharply against the US dollar.
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