Market Analysis Mar 2021

Amidst an initial environment of uncertainty due to unconventional and targeted trading activity, US equities managed to achieve gains during Q1. January commenced with market jitters before a resurgence of optimism surrounding substantial government stimulus measures took precedence. President Biden's confirmation of a $1.9 trillion fiscal stimulus package was followed by a commitment to an additional $2 trillion for infrastructure spending. As a result, energy, financials, and industrials experienced robust growth, while technology and consumer staples sectors lagged. Notably, it's essential to recognize that historical performance does not guarantee future results, and the sectors mentioned serve as illustrative examples without implying buying or selling recommendations.

The Q1 period marked an upswing for European equities, underpinned by hopes for a global economic rebound that supported sectors that faced challenges in 2020, such as energy and financials. The consumer discretionary sector also fared well, with major car manufacturers like Volkswagen unveiling ambitious electric vehicle targets. Conversely, sectors with defensive characteristics, including utilities and real estate, encountered difficulties, partly due to their weaker ties to economic recovery.

March witnessed a record high of 62.4 for the flash manufacturing purchasing manager's index (PMI), signifying robust growth in the sector. Nonetheless, concerns arose due to rising Covid infection rates in some regions, coupled with the imposition of fresh lockdown measures, casting doubt on the service sector's prospects, particularly in the tourism industry. (PMI indices by IHS Markit are based on surveys conducted among companies in the manufacturing and services sectors, with a reading above 50 indicating expansion.)

UK equities delivered robust performance in Q1, with sectors sensitive to economic shifts leading the recovery since November. Materials, energy, and financials stood out, with banks reaping benefits from surpassing expectations and rising bond yields. Domestically focused segments of the market also demonstrated strength, reflecting an improved economic outlook for the UK. The IHS Markit/CIPS composite PMI surged to a seven-month high of 56.6 in March (flash reading), indicating rapid economic expansion as lockdown measures eased towards the quarter's end.

Japanese equities maintained their upward trajectory in Q1, driven by enhanced corporate profits and a weaker yen against the US dollar. Cyclical sectors and value-style stocks with lower-quality attributes steered the market, reflecting expectations of shifts in global interest rates and inflation dynamics.

While uncertainties lingered over the Tokyo Olympics, the likelihood of the games proceeding increased, albeit without international spectators.

The MSCI Asia ex Japan Index demonstrated gains as investors remained hopeful of a return to normal economic conditions. Notably, Taiwan and Singapore emerged as top-performing markets. Taiwan's IT sector and Singapore's banks were pivotal contributors to these strong returns. However, sentiment waned towards the quarter's end due to sluggish vaccination rollouts leading to the reimposition of lockdowns in select nations.

On the other hand, the Philippines experienced the weakest market performance, attributed to a surge in daily new Covid-19 cases prompting stricter restrictions and impacting the outlook for its service-oriented economy. In China, concerns related to policy normalization, regulatory ambiguity in certain sectors, and ongoing geopolitical issues weighed on investor sentiment.

Q1 witnessed a substantial surge in bond yields, attributed to ongoing Covid-19 vaccine distribution in the US and UK, coupled with expectations of substantial US economic stimulus. The US Treasury market experienced its second-largest quarterly decline since 1980, and similar substantial shifts were observed in other markets.

The 10-year US Treasury yield surged from 0.91% to 1.74%, while the 2-year yield demonstrated modest growth, resulting in a steeper yield curve, indicative of mounting expectations for economic expansion. The UK 10-year yield also climbed, increasing by 65 basis points (bps) to 0.88%.

In Europe, the German 10-year yield ascended from -0.57% to -0.33%, while Italy's 10-year yield progressed from 0.52% to 0.63% amid political uncertainties. Spain's yield also experienced an increase from 0.06% to 0.34%. Corporate bonds surpassed government bonds, with investment grade bonds exhibiting negative total returns, primarily in the US dollar market, while high yield bonds demonstrated moderate positive returns due to robust risk appetite and heightened growth expectations.

Convertible bonds, which favor growth and IT enterprises, did not experience significant participation in equity market upswings. The Refinitiv Global Focus index depicted a steady gain of 0.8% (in US dollars) for the quarter, while the primary market observed substantial activity, including over $60 billion in inflows. Valuations experienced a drop, partly influenced by diminished demand for US convertibles.