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What’s been driving stock prices? Are they currently expensive or cheap? And which regions and sectors are poised to do well amid rising inflation and bond yields?
These are some of the questions we aim to answer in our quarterly publication – the Schroders Equity Lens, a compilation of key trends in global equities illustrated through thought-provoking charts.
Click here to download your Q4 copy.
After several strong quarters of gains, global equities fell -1.0% in Q3.
The spread of the delta variant, surging inflation and signs that central banks were getting ready to withdraw policy support weighed on investor sentiment.
Regulatory actions in China and concerns about spillovers from its property market did not help.
The best performing region was Japan (+5.3%), where earnings momentum strengthened and business conditions improved amid a change in political leadership.
The worst performing region was emerging markets (-8.0%), which saw a steep sell-off in Chinese stocks (-18.0%) and continued supply-chain disruptions.
However, many energy exporters posted strong gains amid rising fuel prices, including Russia (+9.5%), Kuwait (+9.1%) and Saudi Arabia (+8.2%).
Despite a strong corporate earnings season, US equities only notched a small positive return (+0.4%), as bond yields rose and the Federal Reserve signalled it would start tapering bond purchases.
As we have written in the past, sharp upward moves in bond yields tend to weigh more on equity returns than more gradual moves that are supported by improving growth prospects.
The sectors that tend to benefit from rising bond yields include banks and energy. Utilities and telecom services tend to underperform.
When rates are rising as a result of higher real yields, value stocks tend to beat growth stocks, while US and Japanese equities tend to outperform the rest of the world.
Q3 sector performance was relatively polarised. Soaring commodity prices and a broad inflationary backdrop meant that global energy stocks were the top performer (+3.1%). Financials also performed well (+2.0%).
However, consumer discretionary stocks were the weakest (-5.0%), weighed down by peaking growth expectations, global inflationary concerns and policy uncertainty in China.
Earnings revisions momentum appears to have peaked in all major equity regions, except Japan where it has started to accelerate.