Whilst the Delta variant of COVID-19 continues to spread in developed and emerging markets, global equity markets remain buoyant as investors weigh the effects of the ongoing virus threat versus increased economic activity as large parts of the developed economies are achieving a more normalized environment due to the vaccination success limiting hospitalizations and deaths. Many emerging markets are struggling with the effects on economic growth, especially in countries like India, China and South Africa. Although it seems like the developed countries are ahead in the race against immunity, the fight is far from over.
At the time of writing the US congress approved an infrastructure bill for the United States. The Infrastructure Investment and Jobs Act includes $550B in new spending over five years, on top of $450B in previously approved funds. $110B would be allocated for roads and bridges, $66B for rail, $55B for water and wastewater infrastructure and $39B for public transit. There’s also money for ports, high-speed broadband internet, replacing lead water pipes and building a network of electric vehicle charging stations. Although the Senate must still approve the bill, the Democrats hold the majority vote, and the Biden administration wishes to stimulate the US economy despite its already heavy US Debt burden. This should bode well for US construction companies and will stimulate the job market comprehensively. All good for US equities and cyclical stocks across the globe as demand for industrial metals should support resource stocks in general.
Chinese technology company valuations have been trending lower relative to their US peers for months amid an escalation in regulatory intervention. The move over the past month has been much more severe and came after Chinese authorities banned for-profit tutoring on its school curriculum. This effectively wiped out a mainly online business model that has attracted major capital in the past.
The market response and spill over into the broader Chinese technology sector (and Chinese assets in general) seems to be based on fears that other business models could suffer the same fate, particularly considering a broader “regulatory clampdown”.
The other major factor in global markets remains the trajectory of inflation from here. Especially US inflation as the fiscal stimulus and infrastructure bill implementation could spur excess demand and drive US consumer spending to a point where US inflation may become a threat to equity market returns as the Fed will need to taper its QE process and bond buying spree.
Despite these factors, equities remain more attractive relative to bonds, cash, and listed property counters globally. Over the past three months, bond yields have receded sharply in the U.S. and Europe, even as corporate profits surged. The improved earnings yields are making stocks more attractive relative to bonds, especially in Europe where the equity risk premium has risen to a 15-month high of 4.5 percentage points. Many strategists raised their targets for U.S. and European stocks this month on higher earnings and lower rates forecasts in the short term.
Investors can expect ongoing volatility as markets weigh the potential negative effects of COVID-19 and a potential US inflation threat to improved company earnings growth as economies recover due to a return to a ‘more normalized’ world. We remain constructively exposed to global equities and within equity markets we prefer developed market stocks to emerging market stocks and growth/quality versus value stocks. We do believe that one can afford some exposure to emerging market (EM) equities and value stocks as a lot of the bad news is already in the price and it may be appropriate to start buying back exposure in EM and value after the recent pull back.
Roeloff Horne
Director and Head of Portfolio Management
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