George Lucas, Raiz Group CEO
Last week marks one year since global equities bottomed out as a result of the COVID-19 virus that sent severe shocks through financial markets as it moved from China to nations in the West.
Since then, we’ve seen a recovery in equities that ran up until the end of 2020, but that has ebbed this year. Indeed, most “risky” assets, like equities, have now clawed back the losses they racked up between 19 February and 23rd March 2020 when COVID-19 sent global equities into a tailspin.
At this point, some classes, like many tech stocks, have even gone above their February 2020 high, reducing scope for further upside, especially as some gains have stemmed from higher valuations, due to lower interest rates.
Higher bond yields could impact equity markets
Another factor impacting equity markets is the recent rise in real yields of long-dated government bonds, notably in the US. For instance, recent concerns, including about inflation, have driven bond yields higher, seeing the 10-year Treasury yield recently top 1.7 per cent.
While this rise in real yields may be justified by expectations of stronger economic growth fuelled by huge fiscal stimulus, it has dimmed the appeal of so-called risky assets such as equities. The trend will likely continue for 2021 as global economies recover, weighing on equity markets.
Rotation trades set to continue
We also expect rotation trades to continue. This describes investors shifting out of tech stocks into sectors recovering from the COVID virus, like banks and airlines as economic recovery accelerates.
This shift has been a feature since vaccines emerged in early November, and it is likely to be of extra benefit equity to markets outside the US where the market weights of COVID- hit sectors are higher.
Briefly, on emerging markets, equities in some EMs could benefit from outsized US economic growth and increased rotation of sectors.
Biden team mulls $3trn spending package
In the US, news outlets reported last week that US President Joe Biden’s advisers are working on a $3trn economic package focusing on infrastructure, ‘green’ investment and funding for childcare and education. It would reportedly be financed partly through higher corporate taxes.
The $3trn spend is likely to be spread over several years and, to the extent that it is offset by higher taxes, the initial impact could even amount to a fiscal tightening. It is not clear when the proposal will be formally unveiled, although reports suggest it may be announced on Wednesday.
It’s likely to be difficult for Democrats to steer another stimulus bill through a narrowly divided US Congress, especially with Biden already passing a $1.9trn package since taking office.
Chinese commodity demand in the spotlight
In Asia, I believe forecasts that China’s demand for commodities will slow in coming months are a little premature, especially as they are calls we have heard for the last few years.
However, the Asian superpower’s stock market has been under pressure lately, with the latest tumbles in the prices of some tech shares in China precipitated by potential changes to listing requirements in the US, driven by political forces in the US.
Another factor is that the boosted demand China experienced due to stimulus during the pandemic, is likely to unwind at least partly as life returns to some form of normal.
Notably, China’s stock market underperformance is not due just to the tech sector. For instance, all sectors of China’s CSI 300 Index have underperformed S&P 500 equivalents so far this month.
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