Market Analysis Apr 2022

The sharp decline in US government bond prices, a trend that had begun earlier in the year, experienced a pause during April. This shift was aided by comments emanating from the Federal Reserve, which prompted a stabilization of the market. Meanwhile, the commodities sector saw an upward trajectory, with agriculture emerging as the standout performer within this arena.

US equities experienced robust gains during April, even as Q1 GDP growth, registering at 6.4% (quarter-on-quarter, annualized), slightly missed the mark by coming in below the projected 6.7%. The trade deficit also widened during this period. However, the Composite Purchasing Managers' Index (PMI), a barometer of business activity based on surveys of private companies within manufacturing and services sectors, surged to 59.7 in March, marking the most significant upswing since 2014, largely propelled by the service sector. Consumer confidence showed improvement, though it still remained below pre-pandemic levels. Importantly, the vaccine coverage had reached 70% of the US population.

The policy landscape retained its accommodating stance, with President Biden presenting a $2 trillion infrastructure and manufacturing subsidy proposal in addition to the earlier $1.9 trillion fiscal stimulus bill. The Federal Reserve reaffirmed its commitment to maintaining a supportive monetary policy until its targets for stable economic growth and full employment are met, even if it entails temporarily exceeding the long-term inflation target.

Buoyed by the backdrop of robust economic conditions and supportive policies, investor sentiment was further uplifted by a strong earnings season. Notably, technology giants like Alphabet, Amazon, Apple, Facebook, and Microsoft collectively witnessed a 41% increase in Q1 revenues. The consumer discretionary sector also displayed notable strength, in tandem with rising consumer confidence. Conversely, energy and consumer staples lagged behind the broader index, registering more muted gains.

In the Eurozone, equity markets also experienced positive gains. After a period of lowly valued segments outperforming, the spotlight shifted towards higher growth areas, with information technology, real estate, and consumer staples emerging as top performers. Conversely, energy recorded negative returns. Automotive stocks within the consumer discretionary sector underwent some profit-taking, while luxury goods displayed robust performance. The onset of the Q1 earnings season was greeted with positivity, as several banks managed to reduce reserves, thanks to government and central bank support that prevented a deluge of bad loans.

Despite surging Covid-19 cases in select countries like Germany, the acceleration of the vaccine rollout enabled certain regions to ease restrictions, fostering a promising trajectory. While GDP data indicated a contraction of 0.6% in Q1, forward-looking indicators painted a brighter picture. The Manufacturing PMI survey reached an unprecedented high of 63.4. Eurozone annual inflation escalated to 1.6% in April from 1.3% in March, while the core measure, which excludes energy prices, rose by a more modest 0.8%. The European Central Bank maintained its asset purchase pace, prioritizing avertance of any surge in borrowing costs that could undermine the ongoing economic recovery. Moreover, Germany's constitutional court dismissed an appeal against the EU recovery fund scheduled for disbursement in July.

UK equities enjoyed a robust showing in April, with small and mid-cap stocks leading the charge and the FTSE 250 index achieving all-time highs. Despite a partial shift away from the trend of lowly valued stocks outperforming, the overall UK market demonstrated commendable resilience. Large oil and gas companies experienced underperformance, as did the financial sector for a substantial portion of the month, only to rebound in the final week, buoyed by positive Q1 results from prominent large cap banks. Mining firms and UK-focused stocks circumvented the broader shift away from lowly valued segments. The FTSE 250 index crossed the significant 22,000 mark, propelled by robust domestic segments. Encouraging economic data and a gradual easing of lockdown restrictions further bolstered various sectors such as retail, construction, and business support services.

An uptick in UK retail sales for March, coupled with robust house price growth in April, underscored the positive momentum. The IHS Markit/CIPS UK Composite Purchasing Managers' Index reached its highest point since November 2013, recording 60.0 in April (flash reading), up from the final reading of 56.4 in March.

The Japanese equity market witnessed a 2.8% dip in April, primarily attributed to concerns of potential activity restrictions, triggering a temporary strengthening of the yen against major currencies. While Japan's Covid-19 infection rate remained low, the consistent uptick in cases led to criticism of the government's response. The anticipated acceleration in the vaccination campaign had yet to materialize. Certain prefectures, including Tokyo, were placed under a state of emergency, raising the specter of potential extensions, albeit complicated by the looming Olympics.

Within the broader Asian context, excluding Japan, equities achieved a modest rise, spearheaded by Taiwan's notable outperformance, driven by strong gains in non-technology sectors. The resources, industrials, consumer discretionary, and financials sectors also demonstrated robust performance. China's equity market posted a modest gain, attributed to positive earnings, a temporary weakening of the US dollar, and relatively balanced valuations. However, India experienced dampened performance due to escalating Covid-19 cases. Notably, mid-cap and small-cap sectors outperformed large caps during the month. While Korea witnessed positive performance, Malaysia, Singapore, Hong Kong, and Indonesia secured modest gains. Conversely, Pakistan emerged as the weakest index market, joined by Thailand and India, which experienced relatively weaker performance during the month.

In the bond market, April marked a slowdown in the decline of US government bond prices, a shift prompted by the Federal Reserve's pronouncements. In contrast, European bond yields continued their upward trajectory, aligning with growing expectations for growth and inflation. The enthusiasm surrounding the prospects of economic recovery spurred positive performance in corporate and emerging market bonds. This sentiment was further reflected in the weakening of the US dollar.

Notably, the 10-year Treasury yield in the US receded by 11 basis points to 1.63% for the month. While the Fed acknowledged improvements in the economic landscape and outlook, they reiterated their intention to maintain policy support. The US economy exceeded expectations, with Q1 growth registering at an annualized 6.4%.

European bond markets witnessed diverse shifts: the German 10-year yield rose by 9 basis points to -0.20%, Italy's 10-year yield increased by 24 basis points to 0.90%, and Spain's elevated by 14 basis points to 0.47%. Germany's inflation surpassed 2% for the first time in five years, attributed largely to elevated energy prices in comparison to the previous year. The UK's 10-year yield remained steady at 0.84%.

Corporate bonds delivered positive returns, outpacing government bonds. In the US, credit bonds led the way, with investment grade bonds slightly outperforming high yield bonds as yields dipped. Europe saw relatively stable investment grade bonds and positive returns from high yield bonds.

Emerging market bonds, particularly local currency bonds, experienced gains as the US dollar softened. EM hard currency debt posted strong performance, with high yield bonds gaining over 3.5%, while EM corporate bonds reported moderate positive returns.

Convertible bonds, as measured by the Refinitiv Global Focus index, recorded a 1.3% increase. The valuation of convertible bonds marginally adjusted downwards, particularly in certain US technology and growth companies.

It is vital to recognize that past performance does not predict future outcomes and should not be the sole foundation for decision-making. The sectors, securities, regions, and countries mentioned within this context are purely illustrative and do not constitute investment advice or recommendations for transactions. Each investor's circumstances, objectives, and risk tolerances should be thoroughly evaluated before making any investment decisions.