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April 2021 Monthly Market Commentary: Desynchronized Economic Recovery

04 May 2021

MARKET CONTEXT: Desynchronized Economic Recovery

Global Macro:  The global economy is bouncing back, entering a reflation period characterized by accelerating growth as well as rising interest rates and inflation, although we believe the rise in inflation will be moderate as salaries are unlikely to increase in a more and more uberized world. Vaccination programs have been the main catalyst for the global economic recovery. However, we note the recovery has been uneven among world regions. China is ahead of other countries: its economy in fully back on track with a 2021 expected growth of 9%. In the US, the economic activity has recovered 80% of its 2019 level with a 2021 expected growth of 6.9%, while in Europe, the activity has only recovered 65% of its 2019 level with a 2021 expected growth of 4.3%. Most central banks around the world continue to guarantee low short-term rates for the years to come, with the US Federal Reserve and European Central Bank (ECB) keeping their monetary policy unchanged following April’s meetings. By contrast, People’s Bank of China (PBoC) has already started to taper monetary liquidity injections in order to control the level of debt in private sectors, such as real estate. Meanwhile, in an effort to curb their ballooning debt following massive stimulus plans, governments around the world are contemplating tax hikes.

Financial Markets: 

We believe the current reflationary environment will benefit cyclical assets, such as financial and energy stocks, more than sectors like technology. Strong growth and low interest rates are supporting the expensive US equity market, with the S&P 500 almost tripling since its pre-2008 crisis level. In contrast, Chinese and European equity indices are barely back to their pre-2008 level. Continuously rising earnings per share, companies’ share buy-backs, and the market dominance of US digital platforms are some of the reasons that explain the outperformance of the US equity market. Nonetheless, we think China’s economic outperformance with respect to the rest of the world, its momentum, and its head start in the new economic cycle would justify a correction of the equity valuation gap with the US. Although Chinese equities have suffered from US sanctions that imposed a ban on investments in certain Chinese stocks for US persons – both individuals and companies – which still represent the largest investor group in the world, we believe corporate tax hikes in the US and on US companies abroad might be one of the catalysts for a correction.

Equity: Month to date the S&P 500 rallied 5.3%, underpinned by the US’ strong economic recovery amid a rapid vaccination rollout; Euro Stoxx 50 +1.4%, Hang Seng Index +1.2%. Fixed Income: The 10-year US yield contracted 12bps in April to 1.63%, which contributed to the rebound of Emerging Market government bonds (+1.9% in USD and +2.2% in local currencies). High-yield corporate bonds also rose 0.1% in EUR and 0.8% in USD. Currencies: The US dollar resumed its bearish trend as US yields seemed to stabilize: EUR +2.5%, CNY +1.2%, AUD +1.6%; safe-haven JPY +1.2%, CHF +3.3%. Commodities: Both oil and gold prices went up in April amid the global reflationary environment: WTI Oil +6.7%, Gold +3.6%.