We mentioned in our mid-February Bulletin that a pause in equity markets seemed likely after a strong start to the month. The 3.8% pull-back in the MSCI World Index (USD) in the last two weeks was, therefore, not unexpected and provided us with an opportunity to add to Asian equity exposure as mentioned in the last Bulletin. Of our total equity ‘budget’ we now have typically around 20% exposure to Asia ex-Japan. Globally, Asian equity valuations are looking increasingly attractive and last year’s fall in the dollar has been helpful to the region. The Chinese economy grew by around 2.3% last year whilst the US contracted by a similar amount and it is likely that the Chinese economy will be bigger than the US by 2028. Of our total Asia ex-Japan exposure, we aim to have 50% or more in China.
Last week marks a year since markets began their short but sharp sell-off as the coronavirus spread and despite this fall, equities have proved to be very resilient to the virus. Since 10th February 2020, when world equities peaked just prior to the pandemic sell-off, the Nasdaq is up 38% and up 93% from its trough on 20th March. The S&P 500 is up 16% and 68% over the same periods.
The fortnight was dominated by increased growth expectations which came on the back of central bank reassurance that stimulus will continue until a recovery is well underway and President Biden’s $1.9trn stimulus package which was passed by the House of Representatives. In response, the yield on the 10-year US Treasury rose 20bps over the period. Market pricing implies that the first full interest rate hike is now expected by the end of 2022, whereas the last forecast from the committee responsible for setting rates in the US (the Federal Open Market Committee) had a median expectation of rates remaining on hold until late 2023.
In equity markets, expectations of a strong economic recovery and the likelihood of higher interest rates supported cyclical stocks such as banks, autos, and energy. The latter was helped by adverse weather conditions in Texas, which recorded colder temperatures than parts of Alaska. The rotation into cyclical companies saw the NASDAQ fall 6.4% reflecting the sensitivity of the high growth index to future interest rate rises.
Federal Reserve Chairperson Jerome Powell reassured the Senate last week that monetary policy would remain accommodative for some time. He stated that it could take three years for the Fed to reach its 2% average inflation goal and that there was no rush to remove stimulus from the economy. He noted that there was ‘a long way to go’ before the US returned to maximum employment as there are currently 10m fewer jobs than before the pandemic hit.
Oil had a good fortnight helped by improved inflation expectations and the shut-down of Texan and Dakota refineries and fracking rigs, owing to the adverse weather conditions in those states. Iran’s decision to rebuff an invitation for talks with the new US administration added further support. Copper, an industry bellwether, has climbed to its highest level since 2011 currently trading at $9,172.50/ton and nickel is trading at 18,607/ton, its highest since 2014.
Good news on the efficacy of the various COVID-19 vaccines continued, with a report that the AstraZeneca/Oxford vaccine reduced hospital admissions by 94% with a single dose although the number of deaths from the virus globally has now passed a grim 2.5 million.
Economic data in the US was generally positive. Personal incomes rose 10% in January aided by stimulus checks (cheques for our British readers). Weekly initial jobless claims for the week ending 20th February fell to 730k and were almost 100k lower than expected. January new home sales figures were also better than expected at an annualised rate of 923k. The flash Markit US Composite Purchasing Managers Index (“PMI”) rose to 58.8 (the highest level since March 2015). Higher disposable incomes led to the personal savings rate rising to 20.5%, which was its highest level since May last year whilst January’s producer price inflation rose to 1.3%.
Data in Europe was also generally positive during the fortnight. The European Commission’s economic sentiment indicator for the Euro-area rose to 93.4 in February (92.1 expected), its highest level since last March whilst Germany’s Ifo Institute of Economic Research business climate indicator also rose more than expected to 92.4. The Euro-area composite PMI rose 0.3pts to 48.1 with manufacturing remaining strong at 57.7, comfortably above estimates of 54.3.
The UK’s fourth quarter GDP reading showed that in the last three months of 2020 the economy grew 0.5% more than expected at 1.0%, although it still shrunk by 7.8% for the full year. In the three months to December, the unemployment rate (excluding furloughed workers) increased to 5.1%. It will be interesting to see how the unemployment rate will be affected by the combination of the unlocking of economic restrictions and the eventual end of furlough schemes. UK CPI (Consumer Price Index) for January was slightly better than expected at +0.7% whilst annual house price growth in December was +8.5%, its highest in over six years.
Japan’s manufacturing reading climbed above 50 to 50.6 (vs. 49.8 in January) despite the extension of COVID-19 measures in most areas although the services PMI fell slightly to 45.8.
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