The latest indicators are beginning to point to the end of the US’s big lead in the spreading post-pandemic economic recovery. Although growth in the US is undoubtedly stronger and well ahead of the other major developed economies at this point, it is increasingly clear that the world economy will re-synchronise in the second half. This new reality may still favour commodities and other risky assets.
In its latest outlook, the OECD labelled the recovery extraordinary and very uneven. Countries’ performance is depending on vaccination progress. Encouragingly, vaccination in the eurozone has finally taken off. In countries that are further ahead (the US, the UK), the challenge now is to convince those people not yet vaccinated to have the jab. This would tackle any lingering uncertainties.
All-time highs for equity indices
The MSCI AC World rose by 1.4% (in US dollar terms) over the month, but the MSCI Emerging Markets index outperformed with a 2.1% gain, as markets shook off geopolitical tensions between China and Taiwan and the prevailing central bank assessment that higher inflation was temporary gained traction.
As a result, long-term bond yields fell in the second half of May, helping to calm markets in risky assets. Solid corporate earnings, strong economic indicators, increased fiscal support and the prospect of a rebound in growth amid improving news about the pandemic all supported equities.
US ‘solo’ is ending
Eurozone equity indices outperformed (+1.6% for the EURO STOXX 50) as the prospect of reopening economies buoyed confidence in the services and retail sectors to well above the long-run average. The European Commission’s economic sentiment gauge, which also takes into account industry and construction, rose to its highest since January 2018. Consumer discretionary stocks outperformed.
In contrast, US investors are beginning to wonder when growth may stall. The enthusiasm about President Joe Biden's stimulus plans is fading now that their adoption by the Senate is likely to take time. Furthermore, increases in corporate and personal taxes to fund these plans could weigh on markets. Against this backdrop, the S&P 500 gained 0.5%. The tech-heavy NASDAQ saw its first monthly decline since October (-1.5%).
The Tokyo stock market suffered from weaker economic data and pandemic concerns. Furthermore, contrary to its usual practice, the Bank of Japan did not buy equity exchange-traded funds (ETFs) in May, even when the market was rocky. The Nikkei 225 index gained only 0.2%.
Adjusting to the post-pandemic world
In the coming weeks, investors are likely to focus on any factors that may indicate that US growth is actually becoming less buoyant. At the same time, vaccination progress in continental Europe and the resulting relaxation of restrictions should allow European economies to catch up in the second half of the year.
That leaves the resynchronisation of the world economy, accompanied by pro-growth fiscal and monetary policies, as the main theme for the coming months.
The bright earnings outlook for companies should support equities. This ‘new’ environment could lead investors to adjust their positioning across markets with US equities now looking less attractive.
We are maintaining our favourable view of risk assets with a focus on those markets and investment themes most exposed to the improving global economic cycle. We would increase our equity exposure in the event of a technical correction.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.