US

The US stock market came under pressure at its all-time high as the epidemic worsened around the world, coupled with news of a proposed hike in capital gains tax, the three major equity indices fell between 0.65% and 1.57% over the past five days ending Thursday. The World Health Organisation (WHO) said the number of daily new cases is on the rise in all regions except Europe, and India in particular has set a new global record of more than 310,000 new cases per day, while places such as Tokyo may also enter a state of emergency. The US stock market reacted negatively to reports that Biden would raise capital gains tax to a maximum of 43.4% on the wealthy, sparking fears that participants might sell assets in advance. Meanwhile, in response to Biden's $2.3 trillion infrastructure plan, Senate Republicans proposed a $568 billion alternative on Thursday that focused on more traditional infrastructure projects and omitted the Democratic proposal for a hike in corporate profits tax.

Recent economic figures and corporate earnings were positive, initial jobless claims in the US fell to a record low since the start of the epidemic. As of Thursday, over 75% of reporting S&P 500 index constituents beat market expectations. It is also worth noting that the Bitcoin has plunged recently, falling below the US$48,000 level at the time of writing. Next week, the US Fed will hold the interest rate meeting, and the preliminary GDP for 2021 Q1 will be released. The market is expecting an annualised growth of 6.5% QoQ.

Europe

European markets fell in line with global equity markets, the UK, German, and French indexes were down between 0.31% and 1.16% over the past 5 days ending Thursday. The ECB kept interest rates unchanged and pledged to maintain its 1.85 trillion euro PEPP unchanged at least until March 2022. ECB President Christine Lagarde said that the bank would not keep pace with the Fed, and the central bank is not considering phasing out the PEPP at this time. Eurozone economic data improved, with the Eurozone consumer confidence indicator rising to -8.1 in April, beating market expectations. Next week, Europe will release the preliminary 2021 Q1 GDP and the April inflation data.

China

Chinese equities performed relatively well this week, with the CSI 300 Index rising 3.41% for the week. Hong Kong markets also rebounded on Friday, the Hang Seng Index ended the week in green, logging a gain of 0.38%. It was reported that the People's Bank of China (PBoC) was considering a third-party buyout of Huarong's $100 billion assets, bringing clarity to the "Huarong debacle" that had plagued the Chinese offshore bond markets, meanwhile Huarong International also announced a turnaround in its first quarter results. Separately, Anta Sports and Meituan, two companies that announced share placements earlier, also rebounded for the second consecutive day, easing market concerns. Next week, China will release official manufacturing and non-manufacturing PMI data for April.

At the start of the year, we were positive on EM equities as we expected the Dollar to go weaker, given that there were 1) low interest rates; 2) continued quantitative easing; and 3) a widening fiscal deficit. However, the Dollar had a recent bull run, mainly on the back of rising rates fuelled by inflation fears. In the mid to long-term, fundamental factors for a weak Dollar never left, commodities prices are also on the rise, both which should provide further support to the EM. However, we have to acknowledge that the constant dread of the Dollar strengthening poses as a material risk to EM equities.

We also note 3 other factors in play which could potentially act as headwinds against EM equities in the mid to long-term: 1) vaccination progress; 2) inflation risk; and 3) potential fiscal cliff. Vaccinations in the EM space is currently lagging, threat of inflation could mark an end to the easy monetary policy, and mounting external debt could result in fiscal cliffs in the near future. These together create a lot of uncertainties for the EM, which would dissuade us from overweighting the market in the short term. Henceforth, we would prefer overweighting DM instead of EM in this time frame.
 

Economic data in the country do remain on the weaker end, as we noted that the household spending figures remain in a contraction YoY, which was expected with the hike in GST and the expiry of government handouts. Retail sales and industry production also stayed negative, in line with the continuously contracting services PMI, although manufacturing PMI still climbed higher, reassuring cyclical bettors. Driven by market capital flows, cyclicals such as consumption, auto, and finance helped support the market.

However, the epidemic situation is seemingly on a resurgence in the country since the beginning of March. The increasing threat of the virus concerns local governments, Osaka have decided to take the Olympic Torch Run off public roads. Overall, the virus still has a stranglehold on the country after more than a year of outbreak, haunting the local economy with the near complete halt in tourism dollars. While the current outlook on cyclicals remains positive, the mid to long term growth prospects of the Japanese market remains lacklustre, and we would be more hesitant to overweigh them in the portfolio.
 

Anticipation of rising inflation and economic growth drove capital to cyclical sectors, which benefitted Europe markets due to their heavier cyclical weightings. Local economic indicators headed higher, the Eurozone manufacturing PMI even hit a record high, reflecting business confidence in the upcoming economic recovery. The ECB has also openly addressed the risk of rising yields, stating that the bank will utilise all available tools to fend off any speculators on rising rates, guaranteeing a low interest rate environment in the future, further supporting equity market performances.

As for the ever important epidemic front, the AstraZeneca vaccine’s earlier suspension was subsequently resolved. Despite the bumps, Europe is still among the vaccination leaders, the European Commission expects the region to achieve initial herd immunity by the end of the quarter, marking a likely end to the endless lockdown restrictions. While the longer term growth prospects in the market remain relatively limited, the cyclical favouring trades could still further boost returns in the short term, valuations are in line with historical levels, which suggests further upside potential as long as the recovery trades are in place in the short to mid-term.

Chinese economic data remained strong as we expected, PMIs stayed in expansion zone across the board, while industrial profits posted record YoY gains due to the low base effect. Outlook on the Chinese economy remains strong, numerous forecasts put China as one of the top performers in 2021 growth, even the conservative outlook on the ‘Two sessions’ set the figure at higher than 6%, which should be positive for the Chinese corporate earnings.

However, the continued clampdown on the liquidity and speculation in the market had negative impacts on the market as valuation multiples were compressed. Moreover, regulatory authorities are considering having more oversight over some of the largest tech companies in China, which led to fears in the market regarding their growth outlook, sending the indexes down despite the positive economic outlook. That said, the main driver for the market slide was due to valuation contraction, which should likely have a temporary effect on the equity performance only. In short, the growth potential in the economy should still favour equities in the mid to long-term, we remain positive on the Chinese market for the year.