- Risk-on sentiments continue to grow, with market participants remaining upbeat about reopening prospects
- Winners for this quarter are value and cyclical sectors, with US, Singapore and Japan the best performing regions
- Losers include defensive sectors like technology and healthcare, as well as the beleaguered Chinese market
- The counter-trend rally in USD has had wide reaching effects, boding well for USD-hedged Japanese funds while being a major pain point for USD sensitive EMs
- Moving into 2Q, the risk-on sentiment should persist and support global equities
So far, 2021 has generally picked up where 2020 left off. Market participants as a whole remain upbeat about prospects for a sustained reopening of the global economy. Renewed expectation of more US fiscal stimulus also pushed equity markets and bond yields higher.
Technology stocks stuttered primarily due to their longer duration characteristics. On the other hand, Financials was the biggest beneficiary given that their earnings are highly correlated with long-end rates. Together with US Small Caps, another sector positively correlated with rates/inflation expectations, they have risen to become our top performers for the 1Q 2021.
Read: Smaller companies in the US could outperform large caps by 10% or more over the next 6 months
Other well-performing market in 1Q 2021 include the broad US equity market. With the US well on track to hit the key milestone of 75% of its population being vaccinated (Herd immunity requires roughly 70% - 85% of a population to be vaccinated), and with further fiscal stimulus in the form of Biden’s infrastructure plan in the works, the US economy appears primed for strong economic growth in 2021.
It is also worth pointing that our own Singapore equity market has had a strong showing in 1Q, and especially in March. With Financials accounting for more than 40% of the STI, it has reacted strongly to rising yields as well as the overall value rotation. We believe that the ongoing value has legs to run, therefore, it is one market we think will do well in 2021.
Read: Singapore: Earnings recovery and dividend yield to support equity market in 2021
On the flipside, China has stood out for all the wrong reasons. Being
the first economy to emerge from the pandemic also means that China would
likely be one of the first major economies to tighten monetary and fiscal
policies. China’s policymakers’ recent emphasis on reducing bubble risks within
certain segments of its economy also did not help with investor sentiment. Finally,
key questions regarding anti-competitive behaviour and ties to the Chinese
military remain unanswered, attracting unwanted regulatory scrutiny from both
home and abroad. All these factors have combined to weigh down on an
increasingly tech heavy Chinese equity market.
Read: Key reasons for the sell-off in Chinese equities and why you should stay the course
Read: Recent Pullback in China Equities a Buying opportunity with more than 20% upside
Finally, with the momentum shifting to cyclicals and value, defensives have generally underperformed. Other than the aforementioned tech sector, the healthcare sector, which has had a stellar 2020, is also one of the key laggards in 1Q 2021.
Economically sensitive sectors have more potential to surprise to the upside after bleak 2020 performances, which has in turn relegated previously resilient sectors to the backseat. While we advocate for value in the current macroeconomic climate, it is worth keeping a close eye out for a momentum shift.
Chart 1: Cyclical Sectors have had the highest percentage in upgraded earnings in 2021 thus far
Source: Refinitiv Datastream, MSCI,
BlackRock Investment Institute, iFAST Compilations
Data as of 31 March 2021.
Table 1: FSMI Equity Returns, 1Q 2021
|
1Q 2021 |
|
|
FSM Indices - US Small Caps Equity |
13.99% |
|
FSM Indices - Financials Equity |
13.01% |
|
FSM Indices - US Equity |
10.74% |
|
FSM Indices - Singapore Equity |
8.63% |
|
FSM Indices - Global Property Equity |
8.43% |
|
FSM Indices - Japan Equity |
8.36% |
|
FSM Indices - Global Equity |
6.32% |
|
FSM Indices - India Equity |
5.51% |
|
FSM Indices - All Equity |
4.80% |
|
FSM Indices - Asia Property Equity |
4.05% |
|
FSM Indices - Asia Ex Japan Equity |
3.87% |
|
FSM Indices - Europe Equity |
3.66% |
|
FSM Indices - Technology Equity |
3.00% |
|
FSM Indices - Emerging Markets Equity |
2.44% |
|
FSM Indices - Healthcare Equity |
0.46% |
|
FSM Indices - China Equity |
0.38% |
Source: iFAST Compilations
Data as of 31 March 2021
Read: Top fixed income funds 1Q 2021: : The looming spectre of rising yields
The story of cyclical growth…
Value and cyclically oriented strategies shine through in 1Q 21, with many of such funds appearing on the top performing list. These funds either have investment mandates with a stated objective of value investing, and/or were well positioned given their asset class mandate, which may typically fall under the value/cyclical category (e.g. Energy, Small Caps)
The Eastspring Japan Dynamic A has had a stellar 2021 so far, buoyed by a sizable allocation to value and cyclicals. Japan’s economy is well positioned for the global cyclical recovery with large portions of its economy involved in the manufacturing and sale of economically sensitive goods like consumer electronics and Autos.
In addition, USD has appreciated about 7% against the JPY this year (as of 31 Mar 2021), which means overseas profits would be translated back into higher profits in local currency terms. The fund’s USD-hedged share class has also boosted returns that would have otherwise been eroded by the JPY depreciation.
Table 2: Top Performing Equity Funds
|
Fund name |
1Q 2021 |
Segment |
|
27.9% |
Japan Equity |
|
|
26.3% |
Asia excluding Japan Small Cap Equity |
|
|
21.2% |
Global Energy Equity |
|
|
19.9% |
Global Resources Equity |
|
|
19.6% |
US Small to Medium Companies Equity |
|
|
18.6% |
US Equity |
|
|
18.0% |
Europe Exc. UK Equity |
|
|
16.6% |
US Equity |
|
|
16.4% |
US Equity |
|
|
15.9% |
Japan Equity |
Source: iFAST Compilations
Data as of 31 March 2021
… and the losers in a risk on environment
Gold yet again comes in last for the second quarter in the row. As a traditionally safe-haven asset, it has struggled in a risk-on environment. Pundits have also pointed to the possibility of cryptocurrency reducing the shine in gold as a hedge against fiat debasement and inflation. With the recent uptick in real rates, gold’s historically strong negative correlation with real rates also partly explains its poor performance.
Other than gold, the remaining underperforming funds in 1Q 2021 all fall under a common theme – they are emerging markets that are affected by the rapid rise in the US 10Y Treasury Yield and a counter-trend rally in the US Dollar. Given the rapid rise in commodity prices, inflation is also beginning to be a problem for the region.
In order to support the currency and combat inflation, these countries had to raise interest rates and impose lending restrictions, at the expense of growth. Coupled with political instability (notably in Turkey and Brazil) and poor headway towards resolving the pandemic situation, these economies find themselves in a precarious position.
Table 3: Bottom Performing Equity Funds
|
Fund name |
YTD |
Segment |
|
-16.2% |
Gold & Precious Metals Equity |
|
|
-14.8% |
Turkey Equity |
|
|
-12.1% |
Brazil Equity |
|
|
-11.6% |
Gold & Precious Metals Equity |
|
|
-11.5% |
Brazil Equity |
|
|
-11.0% |
Brazil Equity |
|
|
-9.2% |
Global Equity |
|
|
-8.7% |
Philippines Equity |
|
|
-8.1% |
Latin America Equity |
|
|
-7.5% |
Indonesia Equity |
Source: iFAST Compilations
Data as of 31 March 2021
Looking forward
Further global vaccine deployment amidst a reflationary backdrop should continue to be a supportive environment for equities. As countries start to reopen and global travel gradually takes flight in a post pandemic world, the cyclical recovery and reopening themes should continue to outperform.
The
counter-trend rally in USD has had a significant impact in our top and bottom
equity funds in 1Q 2021. However, in the medium term, we expect the dollar weakness
to continue. As COVID-19 vaccines continue to be deployed globally, investors
should keep a sharp lookout for a potential reversal in these severely beaten
down EM markets.
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