Although uncertainties remain regarding global equity market sentiment, the success of the vaccine rollout in the developed world, combined with strong pent-up demand for goods and services as economies reopen have created conditions favourable to a market boom.
This year alone, Wall Street has notched up its sixth consecutive month of positive returns. We have seen the strongest global growth since the 1960s and the largest increase in corporate earnings since 2009. This has resulted in another year of strong global equity market returns across both regions and some sensitive cyclical sectors.
Despite anxieties about higher inflation and the impending withdrawal of monetary stimulus measures in the US, the fierce debate about pro-cyclical fiscal and monetary policy under the Biden administration has created a tailwind for US equities. Similarly, global investors now have an appetite to embrace risk and buy on any dips.
Elsewhere, UK and European bourses have benefited from the euphoria of the global economic recovery, as reflected in their higher weightings towards the cyclical sectors – particularly energy, industrials and the financials. In Asia and the emerging markets, recent events – including a new wave of Covid-19, lower vaccination rates and tighter monetary policies – appear to have tarnished investment returns as we head into the second half of the year.
A tightening of monetary policy in China (reflecting a wish to curb speculative excesses) and the Chinese authorities’ recent clampdown in response to regulatory concerns and a number of business activities have heavily impacted certain Chinese shares in recent days. The result has been an extremely disappointing period for investment returns in China, as well as in Asia more widely.
The Chinese government appears to have adopted a more interventionist approach in relation to listed companies and is now looking closely at issues such as competition, data protection, consumer rights, employees’ rights and well-being. A number of major companies – such as Alibaba – have been recently fined by the regulators. And Ant Group (China’s digital payment and financial business) was forced to pull out of its anticipated stock-market listing and restructure its business to bring it more in line with that of a bank than of a fintech operator.
Meanwhile, Chinese vehicle hire company DiDi (which also offers a range of other services from bike sharing to electric vehicle charging) also came unstuck with the regulator amid unspecified issues to do with privacy and data security breaches. This happened just a few days after it had gone public on the New York Stock Exchange. The ensuing regulatory scrutiny meant that it had to stop adding new users, and app stores were forced to remove this highly popular and fashionable new app.
Beijing-based food delivery and shopping platform Meituan has also been beset by problems after the authorities issued new guidelines on conditions for delivery workers. Many technology companies have been hard-hit by similar levels of scrutiny and crackdowns.
State intervention has wreaked havoc in education, for example… and more specifically in the after-school tutoring sector. Covid has dramatically increased the popularity of this sector of the market among global investors. But recent announcements not only threaten to remove foreign investors: companies teaching school curriculum subjects could be prevented from making a profit altogether.
Overall, these recent measures appear to be focused more on powerful and potentially monopolisitc tech giants, while at the same time addressing some of the more sensitive areas. Nevertheless, China remains a country for innovation, and even declares its intentions a long time in advance in its five-year plans. Indeed, technology hub Zhongguancun in Beijing’s Haidian District is frequently referred to as China’s Silicon Valley.
While the recent pullback in China’s stock market and the fall in its leading company share prices are somewhat disappointing for global investors, they do constitute another opportunity to gain a foothold in the region. Evidently, however, it is more important to allocate funds to active fund managers with expertise and a significant presence in the region… rather than to passive index funds.
The bond markets have been another disappointing asset class this year. While allocations toward global equities have been rewarding, the upward pressure from inflation has seen bond yields react erratically, even generating negative returns in most markets and sectors. The careful reopening up of economies around the world and a strong rebound in growth have generally worried bond markets and its traders. Nevertheless, the tilt between lower or higher bond yields is still in the hands of the US central bank: it will be affected by its decision regarding the timing of the stimulus withdrawals and interest rate hikes.
In commodities, a demand over supply issues saw natural gas prices in Europe and the UK soar to some of their highest levels on record. Prices in Asia are also elevated as countries try to attract cargoes of liquid natural gas to meet strong demand. A tight global market could easily be a source of anxiety across Europe as we move closer to the winter months.
On a more positive note, the Q2 US corporate earnings are creating a very positive backdrop for investor and market sentiment: they have seen the highest year-on-year growth seen since Q4 2009.
Analysts are now expecting double-digit earnings growth for the second half of 2021. These above-average growth rates can be attributed to a combination of higher earnings for 2021, as well as to an easier comparison with 2020’s weaker earnings which resulted from the negative impact of COVID-19.
Overall, the investment backdrop remains positive. But we must ask ourselves whether markets are running the risk of becoming over-exuberant as optimism about higher economic growth gains momentum.
There are still a number of uncertainties strewn along the path to recovery. Consequently, performance in some markets could become a little more erratic over the summer months, with returns over the second half of the year being somewhat more modest than in the first. As far as individual regions and markets are concerned, it is likely that those of the developed world, the US, the UK, Japan and Europe will be favoured more than those of the developing world. However, interesting opportunities in China and in Asia more widely cannot be ruled out.