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February 3, 2021
  • Snapshot of Global Equity Markets in January
  • Indian government increases capital spending ahead of upcoming election

With the first month of 2021 behind us, now is the chance to take a brief survey of a relatively modest beginning to the year for world equity markets. In aggregate, markets began the year in good shape, but any gains had vanished by the end of January. The sell-off was accompanied by increased volatility amid concerns over slow vaccine rollouts, vaccine-resistant strains of coronavirus and – in what is certainly the financial story of the year so far – unprecedented, coordinated retail activity on heavily shorted stocks.

The one big takeaway from January’s returns is the relative signs of health in Asia and emerging markets compared to those in the West, namely the US, UK, and Europe. China’s robust economic recovery has been well documented in this newsletter, led by strong industrial output since the 2nd quarter of last year. Its V-shaped recovery continues to be supported by a rise in domestic activity and gathering pace in the service sector. As restrictive lockdown measures remain in place across much of the globe, China’s contrasting economic numbers have helped Asia and the emerging markets outperform since the turn of the year.

In the UK, despite a strong rollout of the Covid-19 vaccine, economic sentiment continues to deteriorate as the country remains in lockdown, with activity suppressed, for the foreseeable future. Meanwhile, across Europe, the relatively slow vaccine rollout has dashed investors’ hopes that restrictive measures would be lifted quickly and risks casting a shadow over the continent’s economic recovery. Finally, the inauguration of Joe Biden has not brightened the macroeconomic picture for the US, which remains mixed. Despite stability in the US housing market, weak labour market figures have dampened the performance for US stocks.

Given the changing global situation, with economies heavily dependent on their governments’ abilities to efficiently roll-out the vaccine, January’s data is by no means reflective of what the global situation may look like in a month, or even three months’ time. However, it certainly establishes the clear positive economic impact that getting a grip on the virus and reducing lockdowns can have on a country’s equity market.

A recent chart by Goldman Sachs reflects an interesting trend in investors’ approach to stocks with a certain level of debt: While investors are not too concerned by stocks with a high level of debt, corporate leverage has been a strong driver of relative performance since 2020. Low debt stocks have consistently outperformed their high debt counterparts, with a significant gap developing in the last year. It’s interesting to view this trend in the context of the last ten years. Since the global financial crisis there has been a certain degree of misallocation of capital, owing to the fact markets have been swamped by liquidity which has had a clear impact on the acquisition of debt across the market. Given the trend of the last five years, it is very likely we can expect investors to continue to favour low leverage stocks when the global economy recovers in full.

Ahead of 2021 election, Indian Government steps up capital investment

The Indian Government’s latest Budget has seen an abandonment of fiscal restraint, with the government stepping up capital investment and implementing financial sector reform. India’s financial year is set to end with a fiscal deficit of 9.5% of GDP, far in excess of the government’s planned 3.5% – as such their target for the next financial year now sits as 6.8%. The government has signaled a 30% increase in capital spending to $75bn, which will largely be reflected in key sectors such as: healthcare, improving primary, secondary and tertiary services, as well as covid-19 vaccines; infrastructure, supporting manufacturing activity; national rail and highway expansion; urban transport and Metro systems (1,016km of new lines); energy, offering more choice of power providers to consumers, and the privatisation of banks and insurance companies. Money earmarked for renewable energy investments was conspicuously absent.

US Vaccine Rollout gives hope for recovery, as house price inflation surges

As the US vaccine rollout gathers pace, the chances are rising of a gradual pick-up in economic activity as herd immunity approaches. The hospitality and leisure sectors, which have been hit hard by the pandemic, will be notable beneficiaries but the rising tide should lift diverse sectors across the US economy. The US housing market has stabilised in recent months. Mortgage applications peaked back in July last year and has plateaued since, but with inventory at the lowest levels in 15 years house prices have rocketed. With the threat of the pandemic gradually fading, construction activity is likely to pick up later in the year, easing inflationary pressures.

  • 09 Feb: After oil prices recovered through January, the EIA Short-Term Energy Outlook will provide a forecast of where the energy sector is headed for the rest of the year.  
  • 12 Feb: The UK’s Q4 GDP figures are expected to confirm that the country suffered the sharpest contraction of any G7 country last year.

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