Five insights in five minutes
Does the spread in a SARS-CoV-2 virus with three mutations in its spike protein change anything? Investors were unsure this week. On Monday risk assets coughed on worries that the Delta variant would hospitalise the global recovery, or at least make it short of breath. Since then, however, the reflation trade is back, wowed by a 70 per cent rebound in US earnings in the second quarter and the fact that 85 per cent of companies in the S&P 500 had beaten estimates. So does Delta matter or not? Certainly over the past month, for example, there has been a strong relationship between the change in the number of infections in a country and its stock market return. And year to date, large-cap American shares have outperformed non-US bourses whenever the virus has surged – including 25 out of 26 emerging markets – and vice versa when cases have fallen. This is shown below. But the chart also suggests the rally in defensive US stocks versus the rest of the world is overstretched even if you believe the trend in Delta is still upward.
Investment relevance: global equities, US equities, emerging market equities, Asia equities
China high yield
It hasn’t been the best of times for China offshore high yield of late. Spreads have widened 260 basis points since the end of May. The reason? China property has been a drag on performance as investors have grown more worried that some firms may have trouble making good on their bond payments, especially with the greater regulatory focus on the sector following the ‘three red lines’ policy the government introduced last year. Indeed, the chart beneath shows how developers in category ‘red’, the lowest scored group under the policy, have seen their spreads jump more than 1,000 basis points in two months – far beyond those in higher-scoring categories. These companies have been forbidden by Beijing to grow their debt until their fundamentals improve. As in all sell-offs, however, financially sound babies are being thrown out with the bathwater. A potential buying opportunity if you know where to look.
Investment relevance: Asian bonds, China high yield
ESG integration and the gig economy
The ever expanding gig economy is estimated to be worth $350 billion this year, with a whopping 17 per cent compound annual growth rate from 2018 to 2023, according to Mastercard data. But behind the success, a raging social battle. In the UK, for example, Uber has been forced to offer drivers a minimum wage, pension and holiday pay. On the other hand, Proposition 22 in California provides a gateway for gig workers to be classified as independent contractors, bypassing worker benefits. Such tussles matter for investors because social factors often move hand-in-hand with returns. A 2015 study by the Investor Responsibility Research Centre Institute and Harvard Law School found that financial performance is positively correlated to social management and training. Another paper, studying the relationship between employee satisfaction and stock market returns, found that the top 100 American companies for employee satisfaction had between two and four per cent higher returns than their industry averages between 1984 to 2011. Integrating the ‘S’ of ESG into an investment process can really drive performance.
Investment relevance: ESG strategies, global equities, global credit
As suggested above, the recent rise in volatility as well as underperformance of value stocks point to a lack of conviction in the recovery story. But what do investors really think? We can try to follow the money. July has seen redemptions in global equity funds after $170 billion of inflows from February to June. Trouble is, such data is backward looking and has no predictive power (see flows note from two weeks ago). Questionnaires can be more instructive and who better to ask than the worldwide membership of the CFA institute? Its latest survey is revealing. Most respondents believe central banks should prioritise exiting ultra-accommodative monetary policy, citing inequality concerns. A doubling of the Fed balance sheet since 2019, they say, has greatly benefited risk assets and their owners. Predictions on how tightening would affect various investments is shown in the chart below. Our strategy team recently polled our own investment platform and a similar view emerged: the reflation trade will continue, with higher yields and value preferred over growth.
Investment relevance: multi-asset, global equities, fixed income
Tech in India
Le malheur des uns fait le bonheur des autres, as they say in France. The misfortune of some can make the happiness of others. So it is for Asian tech funding. While Chinese companies are currently dealing with regulatory headwinds and investor apprehension, India has received worldwide attention with a series of successes in the technology space, as illustrated by record funding rounds and the birth of 16 unicorns so far this year. Indeed since January Indian start-ups have raised $12 billion from venture capital investors alone, some of whom see India as the new China. Of course, India’s internet infrastructure, with only around half the population having access to the web and e-commerce accounting for less than three per cent of retail transactions, barely warrants comparison with China today. But the potential for growth is real, reflecting a global investor appetite for tech companies that is not going away.
Investment relevance: emerging market equities, Indian equities
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