Market Returns – A whistlestop tour of some of the movers and shakers during the year to date.
The chart shows the returns in local currency across a cross sample of major indices.
The table shows returns broken down by asset class and geography but this time in sterling. Sterling strengthening year to date has detracted from returns in overseas markets, in particular those from Japan where yen weakness versus sterling is down 8%.
The following table shows the winners and losers in terms of industrial sector and style:
At face value, the market shape remains broadly the same. UK equities are faring better than last year versus their global peers, assisted by a relatively strong Sterling and ‘value’ sectors such as financials, energy and materials are holding the edge over ‘growth’ sectors such as technology. This has become less pronounced as bond yields retreated from their recent highs and growth stocks finished the quarter strongly.
What is apparent is the swathe of positive numbers across the multitude of sectors and geographies shown. This is being backed up with strong earnings and revenue numbers. For example, Factset report that for Q2 analysts are forecasting S&P 500 companies to deliver earnings growth of over 60% and revenue growth of almost 20% and, for the calendar year, earnings growth of 35% and revenue growth of over 12%. These are big numbers on any measure.
We’re in a period which is combining both continued strength for some long-term winners, with a cyclical rebound in some of those sectors, such as energy, that took such a hit in 2020. Those longer-term structural growth companies such as leading technology companies continue to deliver huge cash revenues and profits. We remain in a ‘happy place’ for now, but some dampeners to this earnings boom may lie on the horizon with increased corporate tax burdens looking likely and the prospect of rising wage pressures to chip away at some of these numbers.
It was, in many ways, a quieter quarter for fixed income markets following the significant rattle rising bond yields caused in Q1, but it was still a quarter with some notable moves.
We have talked at length about the changing signals coming out of the Federal Reserve which point to a slowing of some of the support that has been in place for the economy since the early stages of the pandemic and a bringing forward of expectations for a rising interest rate cycle. This presents a challenge for fixed income markets, requiring a careful and calming voice from central bankers to transition markets into an acceptance of gradual tightening. By the end of the Quarter, there was a sense that US Federal Reserve speakers had calmed initial market jitters.
The direction of the US Treasury yield is crucial for all asset classes. The Treasury market reacted to the Fed’s siren call with rising yields in shorter dated bonds and declining yields in longer dated bonds, flattening the yield curve overall. The US 10 year peaked at around 1.75% towards the end of Q1 and has drifted lower to 1.5% to this point; whereas the US 5 year followed the same drifting pattern, but jumped by around 10bps following the Fed meeting.
Corporate credit was more sanguine. High yield continues to hold on to its positive ground year to date and investment grade credit began to recover from its Q1 struggles. There remains strong investor appetite for credit as a relatively low risk way of picking up some extra yield, whilst default risks remain low, which is helping to support the market. Credit spreads (the extra yield above government bonds of the same maturity) have tightened considerably since last year and don’t look attractive but we’re in a ‘least worst’ market and yield hungry investors offer a support for now. We are nervous of long duration government bonds and have sought shelter in a number of short-dated fixed income funds or strategic bond funds which have some tools to help mitigate against the negative effect of rising bond yields.
Sterling continues to enjoy its time in the sun versus other major currencies, notably versus the yen as its economic recovery and vaccine distribution remains slow versus its peers (but is picking up in advance on the Olympics) and Japanese investors look overseas for yield placing further pressure on the currency.
Prospects of interest rates rises coming faster than previously anticipated helped strengthen the US dollar not only against sterling, but also against a basket of peers.
We were pleased to hear M&G Property was reopening during the Quarter, following its suspension in Q4 2019.
We have maintained some property exposure in its place, introducing Schroders Global Cities Real Estate, a global REIT fund, which offers a broad geographical exposure to real estate investment trusts and a way of retaining access to commercial property rental income streams. We recognise this is higher risk/reward option compared to a bricks and mortar fund, so in the lower risk mandates we are balancing risks through topping up some lower risk/reward funds.
The outlook for UK commercial property remains poor and the immediate prospects for positive returns look muted. We are also aware that the FCA is conducting a review of daily dealt property funds, which casts uncertainty over the continued accessibility to a daily-dealt format. Our fear is that should the FCA deem funds should extend dealing to a monthly or even quarterly dealing period, a further wave of redemptions could be likely and threaten further suspension. Some precursors to what may happen should that take place was demonstrated as Aviva & Aegon decided to place their bricks and mortar property funds into a winding up process. A forced seller in a weak market is unlikely to realise best value.