Macroeconomic factors and investment trends
Global Investment Trends
The acceleration of COVID vaccination programs in the developed world, combined with easy monetary policy and more fiscal stimulus, is pushing GDP growth and inflation estimates higher. These changes are reverberating across global markets, pushing global bond yields and equities higher.
COVID-19 cases pressed higher and eclipsed the 100 million mark globally in January. By the end of the first quarter, recorded cases exceeded 127 million globally, with the U.S. accounting for 23.5% of cases. However, positive developments on the vaccine front have given rise to hopes of sustained economic re-openings, with multiple vaccines being approved in several countries and inoculations gaining traction; by the end of Q1, nearly a third the US population had received at least one vaccination 1. The vaccine rollout in Europe faced challenges, with several countries, including Germany, France, Italy, and Spain, suspending the Oxford/AstraZeneca distribution over concerns that the vaccine could cause blood clots, even as the highly transmissible UK variant continued to wreak havoc, forcing most major European countries to (re)impose strict lockdowns.
U.S. GDP moderated from the sharp rise seen in Q3 to 4% for Q4 of 2020 (annualized quarter-over-quarter) and remained down 2.5% year-over-year. In Europe, Germany’s economy grew by 0.1% in Q4 2020 while France contracted by 1.3% over the same period. China showed considerable economic strength, reporting GDP of 6.5% in Q4 of 2020; China was the only major economy in the world to record positive economic growth with GDP of 2.3% reported for the year.
As economic conditions are generally improving in 2021 bond yields have substantially risen globally. The long-dated government bond yields of the U.S. and Eurozone increased sharply mid-quarter due to higher reflation expectations and continued to climb throughout March, albeit at a slower pace. The 10-year U.S. treasury yield increased 82 basis points over the quarter to 1.74%.
Politically, the start of the year for the US was marked by an insurrection at Capitol Hill and the second impeachment trial of former President Trump. However, heightened levels of uncertainty were quenched as Joe Biden was sworn in as the 46th President of the United States and Democrat wins in both Senate runoff elections in Georgia were confirmed. Another $1.9 Trillion stimulus package was passed in the U.S., providing direct payments to Americans, per qualifying levels of income, and extending the federal emergency unemployment benefits program. At the end of the quarter, the Biden administration announced plans for over $2 Trillion in infrastructure spending. While legislative language has not yet been proposed, the outline covers a wide swath of rebuilding projects for neglected structures, such as highways, bridges, and schools, and is calling for initial investment in more progressive themes such as electric vehicles. Another bill focusing more on social issues is expected to be revealed during the second quarter. Elsewhere, former president of the European Central Bank, Mario Draghi, was sworn in as the 30th Italian prime minister following the failure of negotiations to rebuild a coalition government led by Giuseppe Conte. In the UK, chancellor Rishi Sunak announced a £65bn “spend now, tax later” UK budget to support the economy amid the ongoing pandemic, with a substantial focus on business investment over the next two years. Trade tensions with China escalated throughout the quarter, with the first fray instigated by former President Trump’s ban on various Chinese payment and software. Later in the quarter, the EU, US, UK and Canada imposed sanctions for human rights violations on four Chinese officials and a security organization over the treatment of Uyghur Muslims in the Xinjiang region.
Monetary policy among major central banks remained accommodative, as the U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of Japan (BOJ) kept their policy rates unchanged. The Fed also held to its current pace of asset purchases, while the ECB expanded its bond purchasing program to help curtail negative impacts to economic growth from the rise in bond yields. However, the first sign of possible future monetary policy divergences among developed countries came from the BOJ, which removed its commitment to buy ¥6 Trillion in exchange-traded funds (annually). While the Fed has not expressed concerns over higher bond yields and inflation, it did revise its 2021 growth forecast to 6.5% from 4.2%.
Government Bonds & Yields
Treasury yields rose across the curve, driven higher by inflation expectations. The largest moves in the Treasury curve were seen in the longer tenors. The 10-year U.S. treasury yield increased 82 basis points over the quarter to 1.74% and the 30-year U.S. treasury yield rose to 2.41%, up 76 basis points during the quarter. However, the 5-year U.S. treasury yield had a sizeable increase of 56 basis points and closed the quarter at 0.92%, while the 2-year U.S. treasury yield was largely unchanged. While the rise in yields does improve potential return prospects, we must remember that yields remain low, and that we believe as the world reopens the risks are skewed to higher rather than lower yields. This leads us to believe that returns from government bonds will continue to be hamstrung going forward.
Commodities had a strong quarter as the S&P GSCI Commodity Index returned13.5%. Energy and industrial metals were the main beneficiaries of the reflation theme. WTI crude prices rose 21.9% to $59/barrel at quarter end. The U.S. Dollar appreciated against the Euro, Yen, and Australian Dollar, but depreciated against the Canadian Dollar and Sterling. We no longer expect Dollar weakness to continue into 2021 given US growth upgrades and the larger rise in interest rates relative to other regions. However, mild dollar weakness should resume in 2022. Gold prices fell over the quarter, with the spot price down over 10% to $1,691/oz.
Q1 2021 Performance Summary
Past performance is no guarantee of future results. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect fees or expenses.
Market data source FactSet The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.
Global equities ended the quarter higher, backed by further stimulus and positive vaccines developments. The MSCI All Country World Index returned 4.7% for the quarter and 55.3% over the trailing twelve months. The sector rotation into cyclicals continued and value fared better than growth during the quarter. the MSCI All Country World Value Index returned 9.0% and the MSCI All Country World Growth Index returned 0.3%. Over the trailing twelve months, growth has still outperformed value (41.7% to 37.8%), although the margin has narrowed substantially. International equities were positive for the quarter, with the MSCI EAFE up 3.6% and the MSCI Emerging Markets Index up 2.9% but underperformed the US. The S&P500 finished the quarter up 6.2%, bolstered by strong quarterly returns from the Energy (30.9%) and Financials (16.0%) sectors. Within U.S. equities, small caps continued to outperform large cap markets. We continue to prefer equities to government bonds and credit
Credit markets paused from their recent upward trend and ended the quarter in negative territory. The Barclays Global Credit Index returned -3.7% during the quarter and 8.2% over the trailing twelve months. The Barclays Global High Yield Index returned -1.0% for the quarter and 19.5% over the trailing twelve months. We continue to believe that credit is expensive, and that returns will be hampered by low outright yields and compressed credit spreads, rather than a turn in credit conditions.