13 April 2021 View all posts

Market overview - February 2021

The FTSE World Index ended the month in the black, despite a sell-off from mid-month due to rising fears over the global near-term inflation trajectory. Central banks globally have moved to calm investor fears about expectations for monetary policy over the next few years, but this did little to settle markets and the month concluded on a risk-off slant. Global bond yields moved up.

Market outlook in a nutshell

• We remain constructive on emerging markets amid potential high growth rates in corporate earnings. We continue to believe that the dollar will depreciate as risk appetite increases allowing for an attractive entry point into emerging markets. Relatively robust high-frequency data and contained Covid-19 cases in Asia also bolster our investment thesis at this point.
• Global growth is rebounding. A more material recovery is expected this year as precautionary savings unwind, and as economic activity recovers off a low base.
• The roll-out of a vaccine is expected to be a positive boost to equity markets and an accelerated shift to “risk on” sentiment should also be beneficial to our current positioning.
• Monetary policy has become more supportive and is expected to remain accommodative in 2021. Central banks will continue to add significant liquidity and balance sheet support to their economies.
• Inflation is expected to rebound in 2021, although will likely struggle to remain near target levels on a sustainable basis for a prolonged period.
• Equity sectors that typically benefit within a cyclical upswing and a reflation environment include Energy and Financial where we continue to be constructive. This compares to Consumer Staples and Utilities that tend to underperform in cyclical upswings due to the inelastic nature of their product and services offerings relative to the economic cycle.
• Commodities to broadly benefit from a pickup in global demand.
• Yield curves in many developed economies will likely remain flat or gradually rise, diminishing the capital gain return in bonds as economic growth and inflation accelerate; hence our underweight position at this stage. We do, however, believe that many central banks will continue to intervene in the bond market and supress the pace of yield curve steepening in many of these developed economies.
• Global equities have more investment merit than global bonds based on an elevated earnings yield versus bond yields.

Economic data overview

• US data released in February continued to be broadly positive

The ISM Manufacturing PMI edged down to 58.7 index points in January from 60.5 the previous month, although still well above the 50-point neutral mark. The ISM Services PMI climbed even higher to 58.7 index points in January from 57.7 index points the previous month amid strong increases in new orders and employment. Importantly, in both survey releases, the prices paid subcomponent remained elevated, signalling that inflation will almost filter into higher readings in the coming months. For now, CPI remained unchanged at 1.4% y/y in January; however, we expect a transitory overshoot beyond the 2% target in the second quarter of this year as higher import prices, a relatively low 2020 base and better demand prospects filter into higher inflation prints. Construction spending gained further traction, rising 1% m/m in December, albeit mildly softer compared to the 1.1% rise in November. Factory orders registered their eighth consecutive monthly expansion rising at a more modest 1.1% m/m in December compared to the 1.3% rise in November. The trade deficit narrowed to $66.6 billion in December from $69 billion the previous month, but still registers as the one of the largest deficits on record. Non-farm payroll employment rose by 49 000 in January after retreating by 227 000 in the previous month. Professional and business services (+97 000) and government (+43 000) were among the largest contributors to job gains over the month, while leisure and hospitality (-61 000) and health and social assistance (-40 800) industries were the largest detractors from employment. The unemployment rate edged down to 6.3% from 6.7% in December and average hourly earnings remained unchanged at a relatively robust 5.4% y/y. Retail sales surged 7.4% y/y in January after rising 2.5% the previous month and registers as the largest print since September 2011. Non-store retailers (+28.7% y/y); Sporting goods, hobby, musical instrument & bookstores (+22.5% y/y); and Building material & garden equipment & supplies (+19% y/y) were among the largest beneficiaries of higher consumption expenditure during the month. Industrial production declined at a more moderate pace of 1.8% y/y in January compared to a 3.2% fall in the previous month. Sequentially, manufacturing (+1.1% m/m) and mining (+2.3% m/m) gained further steam, while utilities output (-1.2% m/m) retreated over the month. Existing home sales rose 0.6% m/m and 23.7% y/y in January with only 1.9 months’ worth of housing supply on the market at the current sales pace – the lowest on record.

• On balance, data releases out of the euro area in February picked up some steam

The flash IHS Markit Manufacturing PMI accelerated to 57.7 index points in February from 54.8 in January. Conversely, however, the IHS Markit Services PMI edged down to 44.7 index points from 45.4 in January amid stringent lockdown restrictions hampering business activity. The unemployment rate remained unchanged at 8.3% in December. The second estimate of GDP growth declined by 0.6% q/q in the final quarter of last year, slightly better than the initial estimate of a 0.7% decline, and much lower than the 12.4% acceleration registered in the third quarter of the year. After five deflationary prints, inflation rebounded to 0.9% y/y in January and registers as the swiftest year-on-year gain since February last year– bolstered by services and non-energy industrial prices, as well as a more moderate downturn in energy prices compared to the previous month. Retail sales rebounded 0.6% y/y and 2% m/m in December led by a 12.4% m/m increase in textiles, clothing and footwear. Encouragingly, the ZEW indicator of economic sentiment climbed to 69.6 points in February from 58.3 the previous month.

• Data out of the UK in February largely rebounded

The flash IHS Markit/CIPS Manufacturing PMI accelerated to 54.9 index points in February from 54.1 in January. Similarly, the flash IHS Markit/CIPS Services PMI rebounded to 49.7 index points from 39.5 in January. It is worth noting that businesses’ expectations for the year registered the fastest pace of expansion since September 2009. Housing prices softened to 5.4% y/y in January after rising 6% in December. New car registrations plunged 39.5% y/y in January after falling 11% the previous month and registers as one of the lowest prints on record as showrooms in the country were closed. Similarly, retail sales plummeted 8.2% m/m and 5.9% y/y in January as lockdown restrictions adversely affected consumption prospects. Inflation edged up to 0.7% y/y in January from 0.6% in December. The Bank of England unanimously voted to keep the bank rate unchanged at 0.1% and left their asset purchasing programme unchanged. We remain of the view that monetary policy will remain largely accommodative in the near term. The trade deficit narrowed to £6.2 billion in December from £6.6 billion the previous month as exports (+1% m/m) rose at a faster pace than imports (+0.1% m/m) over the month. GDP growth softened to 1% q/q in the final quarter of the year after surging 16.1% in the third quarter, largely supported by a continued rise in government expenditure (+6.4% q/q from 12.9% in 3Q20). The Gfk Consumer Confidence Index improved to -23 in February from -28 in January and registers as consumers felt increasingly emboldened over an improvement in economic conditions. Average weekly earnings rose by 4.7% y/y in the three months ending December – the largest increase since the three-month rise ending April 2008. Wage increases in the private sector wages (+ 4.6% y/y) outpaced the increase registered in the public sector (+4.3% y/y).

• China February data softened somewhat but remains relatively upbeat overall

The Caixin Manufacturing PMI slowed to 51.5 index points in January from 53 in December as the pace of new order and output growth softened. The Caixin Services PMI dipped to 52 index points from 56.3 in December. Importantly, notable upward pressure stemmed from higher input prices. The credit impulse softened to 7.2% y/y in January from 8.3% in December, highlighting a potential slowdown in the second half of the year given its strong predictive leading indicator properties. Total vehicle sales surged 29.9% y/y in January compared to a 6.5% rise in December and registers as the highest print since January 2013. CPI registered a deflationary print of 0.3% y/y in January after rising 0.2% the month before. Conversely, however, PPI registered its first positive inflation print since January last year, coming in at 0.3% y/y in January this year. The People’s Bank of China left its one- and five-year loan prime rates unchanged at 3.85% and 4.65% respectively. Newly built commercial residential building prices in 70 major cities remained unchanged at 3.7% y/y in January.

• Data out of Japan was somewhat mixed

The flash au Jibun Manufacturing PMI climbed to a higher 50.6 index points in February from 49.8 the previous month and registers as the swiftest increase since December 2018. Conversely, the flash au Jibun Services PMI edged down even further –registering 45.8 index points from 46.1 in January amid stringent lockdown measures adversely impacting business activity. Household spending fell 0.6% y/y in December after rising 1.1% in the previous month amid a sharp decline in discretionary related spending. Bank lending eased to 6.1% y/y in January from 6.2% in December. Preliminary GDP estimates showed that the economy expanded by 3% q/q in the final quarter of the year after rising 5.3% in the previous quarter. A sharp acceleration in exports (+11.1% q/q) and gross fixed capital formation (+3.2% q/q) were among the categories registering the swiftest increases. Core machinery orders jumped 5.2% m/m in December after rising 1.5% the previous month. A more modest deflationary print was registered in January as overall prices declined by 0.6% y/y after contracting 1.2% in the previous month, which was the lowest inflation print since April 2010.