Markets leaned towards recovery trades in recent months, growth segments of the market saw more selloffs as investors deemed them out of favour with the rise in treasury yields. With re-openings happening, there is a higher conviction that cyclicals such as financials and materials have more upside amidst post pandemic demand pent up, especially in conjunction with the boost from Biden’s infrastructure plan. In particular, we are positive on local small caps that has mostly domestic exposure as they are the likely beneficiaries from the process.

As for fundamentals, recent economic figures showed that the US is among the ones leading the way out of this year-long pandemic. Data ranging from manufacturing and services PMIs, nonfarm payrolls, and numerous consumer sentiment indicators continue to recover. Both the IMF and the US Fed have revised up the 2021 economic growth forecast for the country, underpinning our positive outlook for the US equity market. However, investors should also take note of the upcoming tax increases under the Biden administration, which could have a more serious impact on corporate earnings. Depending on the details, we stay selectively positive on the US market, prioritising small caps and cyclicals in the shorter term.
 

 US

The Dow, S&P 500, and NASDAQ 100 reached new record highs on the back of strong US economic data, and the Fed's downplaying of inflation risks. The latest initial jobless claims fell to a record low since March last year, and retail sales in March rose at the fastest rate in 10 months, reflecting the strength of the economic recovery. Despite the largest increase in CPI in nearly nine years, Fed Chairman Jerome Powell played down the risk of inflation, stating that rate hikes would be considered only after inflation and employment targets were met, easing fears of an early end to easy money. US bond yields fell, with the 10-year yield falling below the 1.6% level.

US stocks are back for another earnings season, with the financial sector leading the way, heavyweights such as Citigroup, Bank of America, Goldman Sachs, and JP Morgan Chase all reported favourable results, and 77.8% of the 36 reporting index constituents posted market beating earnings for the quarter, driving positive market sentiment. Next week, the US will release the preliminary Markit Manufacturing PMI for April, which is expected to improve further to 60.0.

Europe

European equities followed the US rally, with the pan-European Stoxx 600 hitting a record high following the footsteps of the German DAX and French CAC. Over the past 5 days ending Thursday, the UK, French, and German indexes gained 0.35 to 1.11%.  Francois Villeroy de Galhau, member of the ECB and President of the Bank of France, said that it was not time for the ECB to lift the exceptional measures and claimed that the rise in inflation in the region was only temporary in nature. In addition, the EU plans to issue around 150 billion euros of bonds annually until 2026 to finance the EU Recovery Fund. Next week, the ECB will hold an interest rate meeting, markets will be watching the outlook for the central bank's accommodative monetary policy in the face of continued economic strength.

China

Mainland stocks were relatively weak, the CSI 300 Index fell 1.37% over the week, while Hong Kong stocks managed to maintain around 1% in the green over the same period. China's economy recorded a strong growth, with GDP growing by 18.3% YoY in 2021 Q1, the highest growth rate since records began in 1992, but it was still slightly below market expectations of 18.5%. The market is concerned about the reform of the 'platform economy', Chinese regulatory authorities have asked 34 Internet platform companies to conduct their own inspections within one month, and will impose severe penalties if monopoly practices such as ‘platform exclusivity deals’ persists. Subsequently many companies in question have issued their 'Commitment to Operate in Compliance with the Law' and pledged to steer clear from the ill-advised practices. In other news, it is also reported that Huarong is planning to fully repay its offshore bonds due on 27 April, easing market concerns and lifting the overall Chinese offshore USD bond market. Next week, China will announce the LPR rate.

 US

The IMF raised its growth forecast and the Fed Chairman reiterated the accommodative stance, pushing global stock markets higher in the wake of the Easter holidays. Over the past 5 trading days ending Thursday, the Dow and S&P rose 1.58% and 3.13%, continued hitting new record highs, whilst the NASDAQ was boosted by the rebound in technology stocks, gaining 4.4% over the same period. The International Monetary Fund (IMF) revised its global economic growth forecast upwards, projecting the US economy to grow by 6.4% this year. The Federal Reserve's March meeting minutes showed that there is still a long way to go before tapering can take place. Powell's comments supported stock market performance as he downplayed the risk of runaway inflation and pledged to bring the US economy on its feet again. The market is expecting favourable economic headlines, including a 5.2% MoM rise in retail sales in March, a further rise in the University of Michigan Market Sentiment Index to 88.8 in April, and the NFIB Small and Medium Business Optimism Index to reach 98.0 in March, and the US will also release the March CPI and the Fed Beige Book next week.

Europe

European stocks continued the advance, with the UK, French, and German equities rising between 1.28% and 2.51% over the past 5 trading days ending Thursday. The minutes of the ECB meeting showed a sweeping consensus on the size of the PEPP under current conditions. President Christine Lagarde expects local economic activities to remain affected by the lockdown measures in the near term, but noted that the economy would gradually recover afterwards. On the economic data front, the Eurozone services PMI read 49.6 in March, higher than market expectations and the initial estimate. As for epidemic updates, the European Medicines Agency (EMA) concluded that blood clots are a very rare side effect of the AstraZeneca vaccine, after which several European countries announced suspending administration of the vaccine to people aged 60 or below. Next week, Germany will release the ZEW survey for April.

China

While the Hong Kong stock market followed global equities and rebounded, the mainland stock market remained relatively weak. The Hang Seng Index gained 1.51% over the past 5 trading days ending Thursday, while the CSI 300 Index showed little change over the same period. The IMF once again raised its forecast for China's economic growth to 8.4% this year and predicted that China will be the biggest driver of the global economy in the post-epidemic era. On the economic front, China's CPI rose by 0.4% YoY in March, while the PPI rose by 4.4% YoY, marking the largest increase in more than two and a half years, both reflecting the accelerating growth momentum. PBoC Governor Yi Gang said China's economy has been recovering steadily so far this year, and macroeconomic policies will remain stable. Next week, China will release GDP for 2021 Q1, as well as fixed investment, industrial production, and retail sales data for March.

 US

US bond yields fielded a recent rally, briefly surpassing the 1.75% level, and global COVID cases are on the rise, but these factors had an immaterial impact on the markets, as global equity markets went higher, the 3 major US equity indexes gained 1.73 - 2.20% over the past 5 days ending Wednesday. Vaccinations in the US continue their rollout, and cases in the US remained under control compared to Europe, market sentiment remains positive as evidenced by the economic indicators such as the Michigan consumer sentiment and the consumer confidence index, both hitting the highest level since April 2020. Biden unveiled the latest infrastructure plan on Wednesday, boosting market sentiment as the proposed USD 2 trillion plan is expected to strengthen the economy, but this could potentially face staunch resistance in the Congress. Next week, US will release the latest ISM services index and JOLT job openings data, alongside with the March FOMC meeting minutes.

Europe

European stock markets have recovered, with French and German markets up 2.02% and 2.72% respectively over the past 5 days ending Wednesday, whilst UK markets showed little movement. As the epidemic staged a comeback in Europe, France announced a fresh round of lockdown measures earlier. The ECB's chief economist Philip Lane said the bank must act as an important stabilising force for the Eurozone economy, as the COVID epidemic will have a lasting impact on the region's economy. The ECB also expressed concerns over rising long-term bond yields, with ECB President Christine Lagarde suggesting that the central bank would use all necessary tools if market participants tried to push bond yields higher. Next week, the Eurozone will release its unemployment rate and Sentix investor confidence index.

China

Despite the continued rebound in the US dollar, confidence in the market has gradually stabilised following the Archegos implosion, with the Hong Kong and Chinese stock markets in the green for consecutive trading days, the CSI 300 Index and Hand Seng Index were up by 2.48% and 1.72% respectively over the past 5 days ending Wednesday. China's official manufacturing and non-manufacturing PMIs for March were 51.9 and 56.3 respectively, both exceeding expectations. It was also reported that China is considering setting up a new stock exchange to attract foreign companies to list in China, raising concerns about the future of the HKEx (388). Separately, Xiaomi (01810) announced the establishment of a wholly-owned subsidiary to develop its smart electric vehicle business.   

해리스 프레이저 홍콩 사무실은 부활절  4월 2일(금요일)부터  4월6일(화요일)까지 휴무입니다. 휴일 동안 접수된 모든 요청은 다음 영업일 4월 7일 (수요일)에 처리됩니다. 불편을 드려 죄송합니다.

 US

US bond yields have retreated, but the global epidemic is showing signs of resurgence. As the Fed Chairman has said that the Fed will gradually reduce bond purchases “when the economy is all but fully recovered”, global equities went lower, led by the technology sector. The Dow, S&P 500, and NASDAQ fell between 0.15% and 1.06% over the past five days ending Thursday. While vaccine distribution has made visible progress, the global epidemic has taken a turn for the worse, and investors are weighing the prospects of economic growth and inflation. U.S. Federal Reserve Chairman Jerome Powell said he would not stop the extraordinary monetary policy support until the economy is close to a full recovery, but also said he would gradually reduce bond purchases as concrete progress is made towards economic goals. The 10-year yield on Treasuries has now fallen back to around 1.62%. Next week, the US will release data on consumer confidence, the ISM manufacturing index and the unemployment rate, all of which are expected to improve significantly.

Europe

Equities in the UK, France, and Germany fell 1.04% to 1.82% over the past 5 days ending Thursday as signs of the worsening outbreak in Europe raised fears that the economic recovery may be affected. ECB President Christine Lagarde said uncertainty remained over the short-term economic outlook, due to the state of the epidemic and the pace of vaccinations, but added that the bank would utilise all instruments in due course to ensure inflation would stay on track. Earlier data showed that the local economy was improving, with the Eurozone's preliminary March manufacturing PMI coming in at 62.4, ahead of market expectations of 57.6. Next week, the Eurozone will release CPI figures for March, market expects the YoY growth to accelerate to 1.4%.

China

US-listed China stocks slumped, dragging the Hong Kong stock market down. The Hang Seng Index is down 2.26% for the week, while the CSI 300 Index rebounded from earlier losses to end the week in green. Driven by the weakness in China concepts and the strengthening Dollar, Hong Kong equities showed short-term weakness, falling for 5 days in a row and lost over 1,500 points. The market is concerned about the Mainland's monetary policy, as the PBOC reiterated the need to maintain a stable, flexible, precise, and reasonably appropriate monetary policy. Next week, China will release the official manufacturing and non-manufacturing PMIs, and the Caixin China Manufacturing PMI for March.    

Our positive view on the high yield bond market holds true up to date. Fundamentals, fiscal, and monetary factors all support high yields, and this should stay true for the years down the line as the global economy is now recovering. The yield curve in a recovering economy tends to be steepening, which negatively impacts investment grade bonds as they tend to have a longer tenor, while high yields usually thrives as they have shorter tenor on average and credit conditions improve in the economic recovery.

Moreover, markets expects major central banks to keep rates low in the short term. US Fed chair Jerome Powell reassured that the Fed does not see the need to raise rates for the coming few years, citing the accommodative monetary policies will stay in place as long as the economic situations have not fully recovered. This creates a healthy environment for the economy for recovery, together with the vast levels of stimulus and other governmental support, high yields and Asian fixed income in particular should continue to see better performance in the short to medium term.

As we reiterated multiple times recently, the current market is not entirely driven by the fundamentals, capital flows also play an important role in dictating market movements. With the current theme of economic recovery, we see the case for Japanese equities performing in the short to medium-term as capital flows still favour the market. However, weakness remains in the economy, as shown by the weaker than expected GDP growth and household spending figures, which makes the long term prospects of the market dull in comparison.

To add on that, the latest updates on the Olympics are also negative for the local economy outlook. Officials have finally made the decision to ban all foreign tourists from coming into the country for the delayed Olympics, which essentially removes almost all the potential gains from hosting Olympics, further impacting the already fragile recovery. Therefore, while the local market can still go further up with the market favouring cyclicals at the moment, the medium to long-term prospects of the market is still likely be limited without any material changes.

Epidemic wise, the situation in Europe continues to improve as daily new cases fell, vaccinations are also picking up in Europe despite significantly lagging behind progress in the UK or the US, which continue contributing to the positive market sentiment. Expectations of the upcoming economic recovery provided ample support to cyclicals, financials in particular gained a lot on the backdrop of a steepening yield curve.

Looking forward, while valuation levels in Europe are relatively fair when compared to historical averages, the region is still suffering from a rather weak economy. Economic fundamentals continue to hint at a subpar outlook, services PMI, consumer confidence and economic sentiment indicators are still depressed compared to long term averages. As recent markets movements tend to be dominated by capital flows, European equities may still see more upside in the short term under the expectations of a cyclical recovery, but the market will likely remain lacklustre in the medium to long-term considering its limited growth potential.

One of the hottest events in the market was the surge in US treasury yields, as 10Y treasury yields shot above the 1.50% level once again towards the end of the month. One of the causes of the resurgence in bond yields was the fear of higher inflation, due to the easy monetary policy and the Fed’s determination to keep the rates low, markets feared that the recovery in the economy could drive inflation up. The surge in treasury yields also indirectly sent the Dollar higher, negatively impacting EM equity returns.

The saving grace is the rise in commodity prices, which is positive for EM due to their general exposure to the commodity markets such as crude oil and other base metals. However, fundamentals in certain parts of the EM sphere remain weak, as the ongoing epidemic remains out of control, which in turn weakens their prospects in the short to medium term. Therefore, in the EM universe, we would prefer Asian markets for their more positive growth outlook and smaller downside.