Multi-Asset-Strategy-Quarterly-030521
- Market update – risk-off sentiment. Since Feb-21, equity markets appear to have adopted a risk-off sentiment. The U.S. small caps index Russell 2000 Index has been in a tight trading range and MSCI Emerging Markets Index is slightly negative. Global value/U.S. small caps significantly outperformed global growth during the first quarter CY21. However, at the turn of the second quarter ‘growth’ stocks have clawed back somewhat. As at Apr-21 month-to-date, MSCI Global Growth Index (+8.2%) is significantly ahead of MSCI Global Value Index (+2.5%), Russell 2000 Index (+3.5%) and MSCI Emerging Markets Index (+2.7%). Similar trend can be found in the tech sector, with mature tech stocks such as Apple Inc (up +10.8%) outperforming high risk tech growth stories such as Tesla Inc (down -17.4%) over a 1-mth period.
- Commodities supercycle – what could go wrong? The narrative around a new commodities supercycle receives a lot of airplay these days. Investors seeking an inflation hedge adds to the strength of this narrative. It is a worthwhile exercise considering the opposing argument to this narrative. What could go wrong with this positive narrative? Could the recent rally in commodity prices start to fizzle out? We nominate a few reasons: China, a major driver of commodities, may pull some liquidity in order to balance out the recovery and not overheat its economy; Multi-decade demand outlook for oil is tapering down; Bitcoin could possibly displace gold in portfolios (or at least attract more dollars which would have otherwise been invested in gold); and “Greening” of economies is a positive long-term thematic but it’s not positive for all commodities. Conclusion – blanket approach to commodities may not deliver. Instead investors should take a more targeted approach.
- Equities – growth may struggle to regain leadership in the near-term. Growth (led by Information technology) stocks saw a period of stellar returns during the previous decade. However, since the Covid-19 market lows of Mar-20, the leadership has shifted to cyclical / value stocks from growth. The sustainability of this shift probably needs to be broken down into two stages – near-term and medium-term. The CY21 consensus earnings estimates show Information Technology sector profits are expected to grow well below the broader market. Instead the key drivers of market earnings growth will come from the value/cyclical sectors in Financials, Energy, Consumer Discretionary, Industrials and Materials. This would suggest, over the near-term, given the strong earnings recovery expected in the cyclical sectors, growth is likely to lag value. In 2022, Information Technology is expected to deliver earnings growth more in line with the broader market. As economic conditions and earnings profile normalise across cyclical parts of the market post 2023, we suspect the attractive growth profile of technology stocks may again warrant a premium.
