Recovery in sight?

6 min read 10 May 21

Summary: The combined tailwinds of improving economic data, strong earnings results, successful vaccine rollouts and a supportive fiscal and monetary policy backdrop, buoyed investor confidence in April. Increasing risk appetite supported broad equity market gains. Investment Specialist, Kirsty Clark reviews recent market performance, and looks at the factors fuelling hopes of a speedy recovery.

Recovery in sight?

Global equities rallied in April as ongoing loose monetary policy, vaccine rollouts, improving economic indicators and strong earnings results boosted risk appetite. The MSCI AC World Index finished the month up 4.4% in US dollar terms.

Developed markets outperformed as mounting COVID-19 cases in India and Latin America, and moderating Chinese growth, weighed on Emerging Market (EM) returns in April. However, both regions gained ground with EM recovering the previous month’s losses. Value stocks consolidated their March gains, but growth stocks were the relative winners in April, while the ‘risk on’ trade continued to support cyclicals over defensives. 

Global large cap stocks marginally outperformed their small cap counterparts, but this was predominantly due to results-driven performance among US large cap names. Small caps outperformed across most other regions including the UK, Europe, Asia and EM. 

Whether investors were targeting reflation beneficiaries (predominantly cyclical and value names), structural growth opportunities, or simply seeking diversification, we saw a broadening of the market rally in April. Frontier markets were perhaps the surprise outperformers. Vietnam, the largest country weight in the MSCI Frontier Markets Index, was up around 8% in April, with investors responding positively to further expansion in Manufacturing PMIs along with the country’s efforts to limit a second wave of COVID-19 infections. Vietnam also stands to benefit from ongoing US-China trade tensions, as companies look to diversify supply chains.

US equities continued to outperform, with strong corporate earnings offsetting concerns about stretched US valuations, runaway inflation and higher potential US taxes. Despite some profit-taking later in the month, the S&P500 and NASDAQ indices were among the strongest performers. 

UK stocks, particularly small- and mid-caps, also performed well on the back of positive economic data and successful vaccine rollouts. The FTSE100 Index of large cap stocks also benefited from the reflation trade in April, topping the 7,000 mark for the first time since the COVID-19 crisis began – with optimism around a speedy economic recovery and results-driven successes fuelling share price gains. Chinese A shares and Japanese equities were the relative laggards over the month. 

Source: Refinitiv DataStream, 30 April 2021. 
Total Returns in USD.

In fixed income, US, German and Italian 10-year government bonds generated modest returns, along with investment grade and high yield bonds. The USD weakened against a basket of currencies.

In commodities, Brent crude finished the month up on the back of reopening prospects. It remains among the strongest performers year to date, up nearly 30% through the end of April. The broader CRB Commodities Index also finished the month 8% higher – as a raft of positive macro data and ongoing fiscal and monetary stimulus supported demand growth. Falling bond yields accompanied by a weaker US dollar provided the opportunity for gold to move higher after being a casualty of the market volatility in the first quarter of this year. 

All sectors gained ground over the month, with more cyclical sectors including materials and financials among the strongest performers. Positive earnings surprises also supported the US tech giants. Globally, software and tech hardware companies outperformed while semiconductors lagged. Energy, consumer staples and utilities were also among the weakest performers. 

Despite raised expectations going into first-quarter earnings season, earnings delivery has been very strong. Both the proportion and magnitude of earnings beats versus consensus estimates surprised positively in April – supported by combined tailwinds and favourable base effects (year-on-year results comparing current numbers with those generated during the initial stages of the pandemic).

As we enter the last leg of the quarterly earnings season, over 80% of US companies and around 70% of European companies have now reported results. For S&P500 companies, 87% beat earnings estimates, while 72% of Stoxx600 companies in Europe reported consensus-beating earnings. Aggregate year-on-year quarterly earnings growth for companies in these indices was around 50% and 48% respectively. Consumer discretionary and financials were the primary drivers of strong earnings growth. Despite the positive surprises, the price reaction to ‘beats’ was relatively subdued compared to the hit taken for ‘misses’, which may reflect that much of this good news is already priced in, or discounted due to easy comparisons.

To some extent, regional developed market leadership in April tracked changes in earnings-per-share (EPS) growth expectations for the same indices. US and UK equities led the gains during the month, mirroring positive changes to 2021 EPS growth expectations for the S&P500 and FTSE100 indices versus pre-COVID expectations. Japanese equities have lagged, mirroring the lower 2021 EPS growth expectations for the TOPIX versus pre-COVID expectations. Easing lockdowns and the pace of vaccine rollouts in the US and UK, in particular, have boosted activity and demand, and increased confidence in a speedy economic recovery.

Source: LHS Chart – JPMorgan Research, IBES, 29 April 2021 *For year ending March 2022. 
RHS chart – Our World in Data, % of the population that received at least one dose. This may not equal the share that are fully vaccinated if the vaccine requires two doses. Data as of 4-5 May 2021. 
 

Given widespread fiscal and monetary support, and the success of vaccine rollouts in the US and the UK (improving in Europe), we believe there is scope for equites to gain further ground in 2021 – particularly if share price gains are accompanied by strong fundamentals and robust earnings. However, the challenge for some of the mega-cap tech companies will be delivering future growth in an uncertain post-COVID environment, to justify lofty valuations. Valuation will matter if earnings disappoint. 

Investor sentiment and risk appetite have improved but much of the good news may have been priced in already, making these ‘frothier’ areas of the equity market vulnerable to negative news. There will likely be further bouts of volatility as investors navigate the reflation phase of the recovery, while any new COVID-19 variants or reopening setbacks have the potential to add another layer of uncertainty. 

The spikes in COVID-19 cases in India and Latin America have highlighted the ongoing human and economic toll of the pandemic, and have served as reminders of the uneven nature of the global recovery. Vaccine rollouts in the US and the UK (also Israel, UAE, Chile and Bahrain) have been the most successful to date, and reached the greatest proportion of the population. While the World Health Organisation’s COVAX initiative, as well as developed country pledges, should see the vaccine rollout in developing countries improve in the second half of this year, supply and logistical issues could curb the pace of progress.

As we emerge from lockdowns, the shape of a post-COVID global economy may differ from pre-lockdown ‘business-as-usual’. Cyclical sectors have gained ground this year and remain well-positioned, in our view, to benefit as economies open up and global growth accelerates. Value has also outperformed year to date, but we believe attractive value opportunities remain – with some of the cheapest areas of the market benefiting from upward earnings revisions across a broad range of sectors. Still, selectivity and flexibility will remain key to navigating an uncertain post-COVID landscape. 

By Kirsty Clark

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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