FSM Indices March 2021 Update: Rotation into value shifts a gear higher

What are FSM Indices?

FSM Indices are a simple average of all unique fund strategies within the category listed on our platform. To ensure the indices can be interpreted meaningfully, each index requires at least five funds to be active. Investors can use it to compare a single fund against its peer-average, or its actively managed products on our platform against the market index.

An improving macro environment continues to favour equities

Global equities continue to outperform global bonds in the month of March despite a jittery market. FSM Indices – Global Equites and FSM Indices – Global Bonds registered returns of 2.01% and -0.18% respectively (as at 31 March 2021).

The general underperformance of the fixed income universe was mainly attributed to the global economic recovery gaining traction, as evident from the better-than-expected readings in the latest releases of economic data.

The rerating in inflation and growth expectations have been the biggest factors contributing to the rapid rise in the longer end of the US treasury yields. 10Y US treasury yields have risen from 1.41% to 1.74% in just a single month, implying a noticeable sell-off, given that price and yields are inversely correlated.

Such asset are perceived to be risk-free and they tend to underperform when market participants rotate out of bonds towards equities and other riskier assets. Similarly, this has an impact in other relatively safe segments of fixed income, such as investment-grade bonds.

On the other hand, riskier segment of the bond market (high yields) have performed well. The FSM Indices – Asian High Yield Bond delivered returns of 0.71% (as at 31 March 2021).  Their outperformance vis-à-vis other fixed income segments  comes amid a backdrop of rising nominal yields largely due to Asian High Yield’s lower duration (2.7 – 3 years) profile.

(See: Asia High Yield: A Gem within the High Yield Universe)

On the equity front, March proved to be a turbulent month for investors as rising yields continue to challenge valuation assumptions for richly valued stocks. But overall, global equity markets have held up relatively well, registering a decent month for investors.

Chart 1: FSM Indices March Performance

 

Asia continues to perform well but Chinese equities sold off. Why?

At a regional level, Asia’s recovery remains resilient despite various headwinds, bolstered by i) a pickup in global demand, ii) robust exports and iii) a confluence of positive cycle dynamics (tech and manufacturing upcycle). 

That said, Chinese equities was met with a violent de-risking in March 2021 similar to what was seen in growth stocks globally. FSM Indices China Equity registered negative returns of 8.69%. The anatomy of the sell-off in our view was because of two reasons: i) market participants were piling into Chinese equities as they expect 2021 to be a big year for China and ii) the realization of Chinese policymakers’ desire to keep its house in order (reducing leverage, improving the use of capital within its economy and financial system). Hence, the combination of frothy valuations and dissipating confidence may have set the stage for the selloff.

(See: Key reasons for the sell-off in Chinese equities and why you should stay the course )

Singapore equities the top performer for the month

Since last year, the Singapore equity market has been a major laggard. Not anymore. With value making a comeback, Singaporean equities as a whole was able to deliver stellar returns for investors – the  FSM Indices Singapore Equity registered returns of 5.02% (as at 31 March 2021). Singaporean stocks found favour with investors looking for inexpensive and cyclical stocks.

Financials, typically a cyclical and cheap segment of equity markets, has an outsized representation within the STI Index. The big 3 banks (DBS, UOB & OCBC) account for more than 40% of the index’s weightage. As an economically sensitive sector, the financial sector is well-positioned to be a strong winner amid the stronger global economic outlook environment.

Investors’ renewed interest does not come as a big surprise. Earnings for our local banks are likely to see healthy rebounds this year, due to a combination of favorable factors like rising Net Interest Margin (arising from steepening yield curves), greater loan growth as economic activities picks up, and lower loan loss provisions required this year.

(See: Singapore: Earnings recovery and dividend yield to support equity market in 2021)

Western economies are escaping the Covid-19 vice grip

Transitioning to the western developed world, European and US equities registered positive returns of 3.07% and 2.15% respectively. The better returns from European equities, we opine, is fueled by the narrative of a value rotation shifting a gear higher. In addition, overwhelming policy support from the European Central Bank (ECB) and an acceleration in vaccine program have likely cushioned the downside risk and drummed up bull spirits among market participants.

Our view

Looking ahead, our views remain largely the same. We expect Asian economies to see a faster recovery to pre pandemic levels compared to its global peers. For China, we are witnessing nascent signs of the recovery momentum moderating, based on the rate of change observed ineconomic indicators, but continue to believe the narrative of a healthy growth in 2021 remains intact.

Recovery momentum in the US is likely to remain strong and the pace of vaccination programs will determine its growth potential. While we note that inflation is picking up in the US, risks still remain manageable in 1H21. 

As the theme of global reflationary continue to gain traction, investors can expect rotation into cyclical/value sectors to accelerate, especially since economic data is showing signs of improvement. We continue to favor EM equities and Asian high yields as current yields and spread presents good entry opportunity.