Market Insights – April 6, 2021

Each week, a team of experts shares its market views with you!

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Growth in China’s services sector picked up in March. The services PMI came in at 54.3, up from a ten-month low of 51.5 in February. The manufacturing PMI, however, was down slightly over the same period.

Several major banks, including Credit Suisse, have recorded big losses following the implosion of the highly leveraged family office Archegos. The firm defaulted on its margin calls, and the subsequent sell-off of the shares underpinning its positions caused prices to plummet.

The US employment market continues to improve, with job growth coming in well ahead of estimates in March. The unemployment rate declined to 6%. 

USA – renewed momentum a boon for the rest of the world

Unless a new COVID-19 variant is discovered that’s resistant to the current vaccines, the global pandemic should soon be over. There may, of course, be further waves of infection, but they should become gradually smaller and less dangerous. Vaccination campaigns are pressing ahead in developed countries and, with production ramping up, vaccines should soon be available in all countries, including the poorest.

The economic recovery is gaining traction around the world and looks set to be very robust. It is being driven by the countries that managed the pandemic most effectively, with China and much of the rest of Asia in the lead, and by the countries that are farthest along with their vaccination rollout, like the United States, where restrictions are now being eased. 

In Europe, vaccination campaigns are also picking up after a very sluggish start, suggesting that growth will gain momentum in the second half of the year. The economic recovery will soon be driven by consumer spending: most households have had no choice but to build up substantial savings since the start of the pandemic, and as confidence returns they will be heavily inclined to start spending.

The biggest winners will be some of the sectors hit hardest by the pandemic, starting with services industries such as hotels and restaurants, tourism, travel and leisure. But if growth picks up again, that could awaken inflation from its long slumber. There are already some signs of pressure early on in the supply chain, with commodity prices rising sharply. 

The money supply has ballooned during the crisis, which could spark inflation fears. Japan and Europe are less at risk than the US, which experienced only a short-lived decline in prices last spring. Despite this trend, we expect US interest rates to rise at a more gradual pace in the months ahead. This environment won’t hold back the stock markets, which will be boosted by the uptick in activity and by corporate earnings growth.

As a result, we still prefer equities to bonds and are more bullish on the stock markets and sectors that stand to gain the most as economies reopen, especially in Europe.

Japan – another summer with no tourists

Japan is getting ready for a second summer unlike any other. In July 2019, it hosted close to three million tourists, but this year the country will remain mostly closed until the end of the season. The services sector won’t be able to rely on Olympics fans to offset the revenues lost since the start of the pandemic in March 2020.

All central banks have played a crucial role during the public health crisis, but the Bank of Japan (BoJ) really pulled out all the stops. On top of that, the government’s fiscal stimulus plan is worth 55% of GDP, compared with 3% during the 2008 financial crisis. However, this dependence on stimulus has become a source of uncertainty, as has the BoJ’s recent policy change concerning its ETF purchases.

But the lack of revenues from tourism and the policy normalisation should be offset by the uptick in global growth. The widespread economic recovery forecast for the end of this year will probably be the main driver of growth in Japan. Given the scope of the US rescue plan and the forced savings that people will soon be spending, it’s difficult to call for caution even though Japanese valuations are relatively high in historical terms.

Although value stocks have done surprisingly well recently, the rise in US bond yields should ease and the sector rotation should slow down as a result. That’s why we now recommend a neutral exposure to that segment of the Japanese market.


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