Monthly markets review - April 2021
A look back at markets in April when shares gained with the US leading the way.
- Developed market equities gained in April with the US leading the way, buoyed by a speedy vaccine roll-out and fiscal stimulus measures.
- Emerging market shares saw positive returns but lagged developed markets. The pandemic continues to be a major concern in several emerging markets, notably India.
- The sharp sell-off in US government bonds came to a halt in April, helped by comments from the Federal Reserve.
- Commodities gained with agriculture the best-performing index component.
US equities made solid gains in April. Economic data was encouraging overall. Q1 GDP growth of 6.4% (quarter on quarter, annualised) narrowly missed expectations of 6.7%, and the trade deficit widened. Even so, aggregate business activity - as measured by the composite purchasing managers' index (PMI - an index of business activity based on a survey of private companies in the manufacturing and services sectors) – climbed to 59.7 in March. The gain was led by the service sector, signalling the biggest uptick since 2014. Consumer confidence, while still below its pre-pandemic level, also rose strongly. Meanwhile, 70% of the US population has now had at least one shot of the vaccine.
And while the recent data have been encouraging, the policy environment is set to stay highly accommodative for some time. President Biden has followed up his $1.9 trillion fiscal stimulus bill with a proposed $2 trillion in infrastructure and manufacturing subsidies. The Federal Reserve (Fed) also confirmed its willingness to run the economy “hot” – or above the long-term inflation target – to the support economic recovery and full employment. It further stated it expects its targets for stable economic growth are still “some time” away and that asset purchases would continue until then.
Investor sentiment was supported by the combined economic and policy backdrops, but also a robust earnings season. Big tech firms were particularly strong - the combined revenues of Alphabet, Amazon, Apple, Facebook and Microsoft jumped 41% in Q1. Consumer discretionary stocks were also buoyant, tallying with rising consumer confidence. Energy and consumer staples lagged the wider index with weaker aggregate gains.
Eurozone shares also gained in April. After the outperformance of lowly valued parts of the market in recent months, higher growth areas tended to perform better in April. At sector level, information technology was among the top performers along with real estate and consumer staples. Energy registered a negative return. Within the consumer discretionary sector, automotive stocks saw some profit-taking after March’s strong gains, while luxury goods fared well. The Q1 earnings season began on a positive note. In particular, several banks have been able to reduce reserves, or lower provisioning levels, because government and central bank support has so far averted a wave of bad loans.
Several countries, including Germany, continued to battle rising Covid-19 infections. However, rates slowed in Italy, enabling the government to loosen restrictions in some regions. Many eurozone countries began to speed up the roll-out of Covid-19 vaccines as supply increased. Germany’s constitutional court rejected an appeal against the EU recovery fund, which is set to be disbursed from July.
GDP data showed the eurozone economy contracted by 0.6% in Q1. Forward-looking data was more encouraging with the manufacturing PMI survey reaching a new record high of 63.4. Eurozone annual inflation was estimated at 1.6% for April, up from 1.3% in March. However, the core measure, which excludes energy prices, was up just 0.8%. The European Central Bank had quickened the pace of its asset purchases in March, due to the renewed wave of the virus, and confirmed in April that it would maintain this pace so as to avoid a rise in borrowing costs that could jeopardise the economic recovery.
UK equities performed well, led by small and mid cap stocks as the FTSE 250 index hit all-time highs. The market recorded another strong month despite a partial reversal of the trend for lowly valued stocks (where the UK market is well represented) to outperform. The lowly valued large oil and gas companies underperformed, despite ongoing strength in crude oil prices. Financials also lagged for the majority of April, although they bounced back sharply in the final week following encouraging Q1 results from large cap banks. Mining companies (helped by strong commodity prices) and UK domestically focused stocks escaped the broad rotation away from lowly valued areas.
It was strength in domestic areas of the market which helped propel the FTSE 250 past 22,000 for the first time. Domestic stocks were buoyed by encouraging economic data as the country took additional steps to ease lockdown restrictions, with retailers, housebuilders, business support services companies and construction groups all performing very well. The Office for National Statistics confirmed that UK retail sales had surged in March ahead of the lockdown easing, up 5.4% month-on-month and 7.2% year-on-year, well above expectations for 1.5% and 3.5%. House prices continued to climb strongly in April. Meanwhile, the IHS Markit/CIPS UK Composite Purchasing Managers’ Index rose to 60.0 in April (flash reading), from a final reading of 56.4 in March and its highest level since November 2013.
Asia ex Japan
Asia ex Japan equities recorded a modest gain in April as the rollout of Covid-19 vaccines in many parts of the world boosted optimism for a return to economic normality. Taiwan was the strongest index market and outperformed, led by strong gains by non-technology stocks. Resources, industrials, consumer discretionary and financials all outperformed after the US did not name Taiwan as a currency manipulator. Malaysia, Singapore and Hong Kong SAR also achieved modest gains during the month. Conversely, Pakistan was the weakest index market during April. Thailand and India were also weaker during the month.
China achieved a modest gain during the month following two consecutive monthly declines as solid 2020/21 earnings, a temporary weakening of the US dollar and less stretched valuations buoyed market sentiment. Healthcare, materials and staples led the Chinese market while real estate, utilities and financials underperformed during the month. In India, increasing cases of Covid-19 weakened market sentiment as the number of new infections and deaths surged during the month. Healthcare and materials outperformed while consumer staples and consumer discretionary lagged. Mid-caps and small caps outperformed large caps in April. Indonesia and the Philippines both recorded a modest decline over the month, while Korean equities achieved a positive performance in April.
The Japanese equity market declined 2.8% in April, although all this move occurred in just two days when investors saw a greater chance that Japan may re-impose restrictions on activity. The yen initially moved sharply stronger against major currencies before retracing about half of the move before month-end.
Although the rate of Covid infections in Japan remains markedly below most other countries, the persistent increase in cases continues to cause concern among the population and has heightened criticism of the government’s response. In addition, the much-anticipated acceleration in Japan’s vaccination programme has so far failed to materialise.
These concerns culminated in the re-imposition of a state of emergency covering Tokyo and three other prefectures from 25 April, just weeks after the previous restrictions were lifted. The current restrictions are planned for only 17 days, which could clearly be extended but the political timing becomes very complicated ahead of the Olympics.
Nevertheless, industrial production data remained solid over the last three months despite various states of emergency being in place for most of the period. The corporate results season began just before the end of April. Only minority of companies had therefore reported in April, but these numbers so far look good against consensus expectations, as they did in the previous quarter.
Emerging market (EM) equities recorded a gain in April aided by dollar weakness but underperformed developed markets. Covid-19 continues to be a concern in several EM, with India suffering a notable surge in cases during the month, while the pace of vaccinations in many EM remains slow.
Poland was the best-performing market in the MSCI EM index as the government began to ease lockdown restrictions late in the month. Taiwan, Argentina, and Greece, where the government announced plans to open up its tourism industry in May, all outperformed the index. Brazil also finished ahead of the index, supported by higher commodity prices and currency strength.
Political uncertainty in all three Andean countries contributed to their underperformance in April, with Chile the weakest market, followed by Colombia and Peru. Pakistan and Thailand also recorded negative returns and underperformed the index. In Thailand, a rise in Covid cases raised doubts about the timing of the economic recovery, particularly in tourism.
The sharp sell-off in US government bonds came to a halt in April, helped by comments from the Fed. European yields rose (i.e. prices fell), continuing to diverge from the US, due to rising growth and inflation expectations. With continued optimism over the economic recovery, corporate and emerging market bonds performed well and the US dollar weakened.
The US 10-year Treasury yield declined by 11 basis points (bps) to 1.63% for the month. Echoing the previous month’s comments, the Fed acknowledged improvements in the economy and a better outlook, but clearly downplayed any prospect of removing policy support. The US economy grew at an annualised 6.4% in Q1, beating expectations.
In Europe, the German 10-year yield rose by 9bps to -0.20%. In the “periphery”, Italy’s 10-year yield increased by 24bps to 0.90% and Spain’s by 14bps to 0.47%. European yields had shown a degree of resilience to the global sell-off in yields in recent months. In April, expectations for growth and inflation picked up. Inflation in Germany rose above 2% for the first time in five years, although this was due to higher energy prices compared to a year ago. The UK’s 10-year yield was unchanged at 0.84%.
Corporate bonds produced positive returns and outperformed government bonds. US credit led the way, with investment grade slightly ahead of high yield, supported by falling yields. European investment grade was flat, but ahead of government bonds, while high yield made positive returns. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.
Emerging market (EM) bonds gained, led by local currency, as the US dollar weakened. EM hard currency debt performed well, with high yield bonds gaining over 3.5%. EM corporate bonds made more moderate positive returns.
The Refinitiv Global Focus index, which measures balanced convertible bonds, advanced 1.3%. Valuation for convertible bonds cheapened slightly, especially for some US technology and growth companies.
In commodities, the S&P GSCI Index made a modestly positive return. Agriculture was the best-performing component with strong gains recorded for corn and wheat. Sugar and coffee also achieved robust gains. The industrial metals component also performed well, led by gains for copper and nickel. Energy was lifted by gains for natural gas and oil. Precious metals were modestly higher, with small gains for both gold and silver. Livestock fell, led lower by sharp declines in feeder cattle and live cattle.
Total returns (net) % – to end April 2021
Source: Thomson Reuters DataStream.
Local currency returns in April 2021: *-2.8%, **0.2%.
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