|Sterling denominated returns of major indices||Q1 2021
|World (ex UK)||3.5||14.0||22.0||-3.5||13.3||29.3|
|Overseas Bonds (unhedged)||-5.7||5.6||2.7||5.1||-2.3||21.9|
Source: MSCI UK IMI, All Country World Ex-UK, Emerging Markets, UK IMI Liquid Real Estate, Cash Equivalent (GBP 1W LIBOR -1%); BofA ML: Global Broad Market+, Sterling Non-Gilts. Total Return, Sterling adjusted.
Markets remained unsettled in March by the rise in US Treasury yields and concurrent rise in inflation expectations. This has broad implications across equity, bond and commodity markets. With much of the developed world sovereign debt market yielding below zero in real terms, and large new issuances of debt to fund the Covid-19 response, sharp inflation surprises can impact capital markets. Equity valuations are also often based on the risk premium they offer versus safer sovereign or corporate bonds, so any sharp changes to inflation expectations, and subsequently bond yields, can lead investors to reevaluate the price they are willing to pay for equities.
The US treasury market is the world’s largest and most liquid sovereign bond market, and therefore changes to yields and prices in this market tend to reverberate around the world. In March, the nominal yield on the benchmark 10-year Treasury topped 1.7%, up from a low of 0.52% in August 2020. The increases were driven by weak demand for Treasury auctions, leading investors to reassess the market’s demand for lower yielding debt. It is worth noting, however, that yields have only risen to levels last seen before the pandemic in January 2020.
The MSCI USA index ended the month up 2.28%. Towards the end of the month, specific US and Chinese equities suffered heavy losses as a hedge fund Archegos (set up to invest the assets of billionaire Bill Hwang) was forced to unwind positions in stocks such as Baidu and ViacomCBS. This then led to a decline in bank shares around the world, especially those that had acted as ‘prime brokers’ to Archegos.
During March, the new Biden administration sought closer ties with Europe but continued Trump’s tough policy line on China. Furthermore, Anthony Blinken, US Secretary of State, made clear a number of the new administration’s positions in March: costly foreign wars would be avoided, NATO and other multilateral organisations would be supported, and ties with countries damaged by the Trump administration would be repaired. The implication for investors is that the US will act multilaterally rather than unilaterally, as evidenced by Biden rejoining the Paris Climate Agreement and the World Health Organisation.
European equities performed strongly in March, ending the month up 3.15%. This was despite renewed Covid-19 restrictions in the continent’s two largest economies, France and Germany. Europe was embroiled in further uncertainty over its vaccination programme, and correspondingly whether to implement lockdowns in the face of a third wave on the continent. A spat with pharmaceutical vaccine maker Astra Zeneca escalated when 29 million doses were found in Italy. Furthermore, countries squabbled over allocations as they increasingly struggled to prevent a return to domestic lockdowns. In Germany, the constitutional court temporarily halted a law passing the EU’s pandemic recovery fund, after a legal appeal that contended the fund may be the first step towards a fiscal union.
Asian equities lagged in March, as the Asia Pacific ex-Japan index ended the month down 3.19%. Chinese equities pulled back from their strong start to the year, on fears that the Communist Party may increase regulation of big tech and clamp down on lending across the economy. Moreover, China found itself under pressure from both the European Union and the new US administration over its treatment of Uighur minorities in the province of Xinjiang. The diplomatic tension threatened to undo a landmark trade deal signed with the European Union. Certain Chinese equities were also pulled down towards the end of the month by the unwinding of Archegos’ derivatives positions.
UK Equity markets rallied in March, with the MSCI UK index rising by 2.56%. By the end of March, the United Kingdom had vaccinated approximately 58.7% of the adult population. Continued success on the vaccine rollout paved the way for lockdown easing to formally commence on 29 March. In March, Greensill Capital collapsed after its largest client Sanjeev Gupta, a steel magnate, defaulted on loans linked to the company. The case is notable for its complexity, and also links to the British establishment, as former Prime Minister David Cameron served as an adviser to the company and allegedly lobbied for Greensill to receive greater Covid business relief loans.
Japanese equities followed Asia Pacific lower, but remained in positive territory this month with the MSCI Japan Index up 0.23%. Japan offers a counterview to the thesis that massive monetary policy expansion stokes inflation; since the 1990s the country has had interest rates near zero and many years of quantitative easing but low inflation and periods of deflation have still persisted. However, in a policy review in March, the Bank of Japan signaled a change in monetary policy towards a less aggressive and more sustainable approach. In practice, this will mean reduced intervention in Japan’s equity markets (7% of which the Bank of Japan already owns) and marginally less yield curve control, allowing 10y government bonds to fluctuate by plus or minus 0.25% instead of the previous 0.20%. In addition, any hope of a fiscal boost from foreign tourism during the Olympic Games, rescheduled for this summer, were finally dashed with the announcement of a ban on foreign spectators.
Outside the United States, Emerging Markets tend to be most impacted by rising bond yields. Countries with weaker currencies can issue bonds in US dollars to attract foreign investment, but this exposes them to currency risk particularly if the dollar strengthens, which tends to happen when bond yields in the US rise. Consequently, the MSCI Emerging Markets index was the second worst performer this month, ending the month down 2.20%. East-West trade was interrupted more than once in March, notably by a grounded tanker in the Suez Canal. India also blocked exports of Covid-19 vaccines as it raced to inoculate all over 45s with existing supplies. The Serum Institute of India is responsible for manufacturing many vaccines, including 550 million doses of Oxford/Astra Zeneca and 550 million Novavax vaccines. The country has thus far exported more vaccines than it has administered, leading to internal pressure on the government to prioritise vaccines for its citizens.
Inflation remained the dominant theme in markets for March, as yields on bonds signaled higher expectations. This followed through to the equity and commodity markets, as some investors reappraised their portfolios to accommodate for an expected increase in inflation. Meanwhile the collapse of Archegos and Greensill were cautionary tales in poor risk controls and excessive leverage. As nations around the world seek a quick return to normal, vaccine nationalism is taking hold. Cantab is monitoring the prospect of higher inflation and portfolios remain diversified to mitigate the impact of sharp changes in the macroeconomic outlook.
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.