FSM Indices April 2021 Update: Tech earnings beat & reopening optimism continues

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.

Asset class

In a volatile trading month of April, global equities outperformed global bonds. FSM Indices – Global Equities and FSM Indices – Global bonds registered returns of 2.39% and -0.82% respectively (as at 29 April 2021).

To put things into context, the global bonds benchmark (as gauged by the Bloomberg-Barclays Global Aggregate Bond Index) has done fairly well, delivering returns of 0.48% (as at 30 April 2021). The slight gains of the benchmark comes during a period of falling 10Y yields for US Treasury bonds, to its lowest level in a month as renewed concerns around virus spread globally outweighed the strong economic prints.

Having said that, global bond funds on our platform for the month of April, have broadly underperformed. We think this is likely due to the funds’ lower-than-benchmark duration positioning across the board. Furthermore, a weaker US dollar over the month (~1.2%) against the SGD has also impacted on the funds’ returns.

While global bond funds underwhelmed, Emerging Market (EMs) bond funds was the gem in the fixed income universe – the FSM Indices Emerging Markets Bond registered monthly returns of 0.35%.

On the equity front, global markets experienced a volatile month of trading as market participants look to the bond market for cues. But overall, global equity markets have performed well, registering a good month for investors. 

Chart 1: FSM Indices April Performance

Europe propelled ahead as western economies escape the virus vice grip

At a regional level, western developed markets (DMs) have which have been lagging the recovery of its Asian peers plays catch up in the month of April. FSM Indices – Europe Equity and FSM Indices – US Equity delivered returns of 4.03% and 3.71% respectively (as at 29 April 2021).

In the US, market participants were met with a confusing mix of positive (an improving economic backdrop and falling rates) and negative (a potential tax hike by the Biden Administration) developments, but nonetheless finished the month on a good note as the global reflation theme remained largely intact.

Moving to the Euro area, the better performance relative to the US in our view, is attributed to the narrative of a value rotation shifting a gear higher on the back of better-than-expected economic readings. Europe’s service sector has returned to growth while manufacturing activities continued booming. Further fueling the bull spirits amongst market participants is i) an acceleration in vaccinations programs, ii) a possibility of lockdown measures being lifted and iii) an overwhelming policy support from the European Central Bank (ECB).

Chart 2: Europe PMIs illustrates an improving macro backdrop

Notably, our recommended fund, Blackrock European Special Situations A2 EUR, a fund which places particular emphasis on “special situations” companies that, in the opinion of the investment adviser, are companies with potential for improvement that the market has failed to appreciate, had outperformed its peers. The fund has delivered returns of 5.76% for our platform investors (as at 30 April 2021).

Asian equities take a breather from its stellar run

While western DMs have taken the spotlight in April, Asia did not fall behind by much. Asia’s recovery remains resilient despite virus headwinds in some economies, bolstered by i) a pickup in global demand, ii) robust exports and iii) a confluence of positive cycle dynamics (tech and manufacturing upcycle). As such, FSM Indices – Asia Ex Japan Equity registered returns of 1.53% (as at 29 April 2021).

Interestingly, Chinese equities, which have been on a tear for the bulk of 2020, is appearing to moderate after the violent de-risking event the month prior. Overall, the FSM Indices China Equity delivered returns of 0.25% (as at 29 April 2021). The soft returns in April we believe, is due to investors’ easing optimism surrounding China’s stronger Covid-19 management and economic recovery as a result of short term headwinds such as i) China’s further restrictions on online financial platform, ii) potential geopolitical risk and iii) a slowing credit growth.

Having said that, our recommended fund, JPMorgan Funds - China A (acc) SGD, which aims to provide long-term capital growth by investing primarily in companies of the People’s Republic of China (PRC) has outdone most of its peers by a huge margin – the fund returned investors 1.29% (as at 29 April 2021).

Tech sector springs back to life in April

In the opening quarter of 2021, the Technology sector has seen a sharp sell-down as a rapid rise in 10Y yields challenged the rich valuations of the sector. However, as we enter the earnings season, a turnaround for the sector is witnessed.

Earnings of tech companies have beat sky-high expectations, proving investors wrong of their expectations that the re-opening of the economy will be a headwind to the growth style. In addition, yields have moderated at a comfortable range of 1.5% -1.6% over the month, easing off some of the previous concerns regarding higher yields. As such, the technology funds on our platform was able to yield investors good returns – FSM Indices – Technology Equity registered returns of 7.26% (as at 29 April).

Catching our attention is the Blackrock World Technology Fund A2 SGD-H. The fund which invests at least 70% of its total assets into global equity securities of companies whose predominant economic activity is in the technology sector, has delivered a whopping 8.7% return for our investors. 

Our views ahead

Looking ahead, our views remain unchanged. We continue to hold the view that Asian economies should see a faster recovery to pre pandemic levels compared to its global peers. Recovery momentum in the US is likely to remain strong within the near-term (especially due to low-base effect), but we believe the pace of recovery could be peaking and momentum should slow across the 2H this year. Taking note of rising inflation, we hold the view that it will still be manageable given the economy’s still significant excess capacity.

For the case of Europe, we think that the outlook is beginning to look rosier but remain cognizant that the recovery momentum may hit minor speed bump as the region faces yet another round of virus resurgence.

Overall, we hold a favorable view towards EM debt hard currency as our findings show that risk should be relatively low and manageable moving forward. EM credit default swaps index and sovereign credit ratings are also pointing to a declining default probability as well as a moderating rating downgrade trend.

(See: EM Hard Currency Debt: Down But Not Out)

[All return figures are in total returns and SGD terms as of 29 April 2021]