Hyperinflation or overhyped? - Global equity markets

The momentum behind equities is showing no signs of abating as global equity markets once again pushed higher during the month. Improving economic data points, accommodative monetary policies and more recently, strong corporate earnings, were key drivers behind global equity market performance as the MSCI All Country World Index gained a little over 4% during April.

In the US, there is a lot to be positive about. During the first quarter of 2021, the US economy grew at an annualised rate of 6.4% and is now within 1% of the peak that it reached in 2019, just prior to the onset of the pandemic. Over 100 million US citizens have been vaccinated, a little over 40% of the nation’s adult population. US household income increased by more than 20% during March with much of the increase attributable to the $1,400 stimulus checks that have landed in consumer bank accounts along with a reluctance to spend on services due to fear or lack of availability. As a result, consumer spending only rose 4% during March though it is the largest month-to-month increase in close to a year. As the US economy continues to reopen it is likely that much of this saving will flow into the economy to satisfy the pent-up demand which will be a boon for stocks associated with the services industry. Demand for equities by the US public has soared to elevated levels. Equities now account for 45% of total household financial assets, surpassing the level reached prior to the dotcom bubble. Most companies in the US reported stronger than expected earnings for the first quarter of 2021. Results from technology stocks, specifically Big Tech names such as Alphabet, Amazon, Apple and Microsoft were incredibly strong, outperforming the broader indices during the month. The astounding numbers put out by Big Tech reminds us just how much more influential they have become following the onset of the pandemic. Combined, the above the factors continued to lead the S&P 500 Index higher and in April it saw an increase of a little over 5%.

President Biden has shown that he is not afraid to loosen the purse strings. In his first 100 days as president, he has passed a $1.9 trillion spending package and has plans to spend a further $4.1 trillion on infrastructure as well as family and education. These plans have of course been met with strong resistance from Republicans especially with the administration’s preferred method of payment for the spending coming from increased taxes for the wealthy and corporations. As a compromise, the GOP has proposed a much smaller plan, around $500 billion. It is likely the final bill will come somewhere in between the two figures.

Whilst the US Federal Reserve (the “Fed”) did acknowledge an improvement in the economy, the Fed Chairman Jerome Powell noted the economy remains a long way from the central bank’s goals and therefore it would not reduce support until substantial progress was made.  The Fed thus continued to reiterate its stance of keeping interest rates unchanged whilst maintaining the pace of its asset purchases ultimately ensuring that accommodative monetary policy remains in place. The bond market seems somewhat more sceptical, anticipating a rate hike sooner than the Fed intends, with US 10 Year Treasury yields hovering around the 1.6% mark, well above the 0.9% level we saw at the start of the year.

Economic data in Europe has not been as strong as that of the US with strict lockdowns continuing to impact negatively. The Euro-zone GDP for the first quarter of 2021 declined 0.6% from the previous quarter, with Germany in particular one of the harder-hit regions. Despite the decline, European equity markets climbed higher during the month with the STOXX Europe 600 gaining a little over 2% supported by better than expected earnings as well as the continued roll-out of the vaccine across the continent which is likely to lead to an improved GDP number in the second of quarter.

The gains seen in global equity markets were fairly broad-based though the commodities-heavy materials sector once again showed strong performance. Commodity prices have been on a tear of late due to strong demand from China, clogged-up global supply chains, government spending (or anticipation thereof) on infrastructure and demand for raw materials that are consumed as part of the growing “green” revolution. Copper, a key material used for renewable energy generation as well as in the production of electric vehicles, briefly traded above the $10,000/ton level for the first time since 2011 before closing at $9,949/ton, a gain of 12% for the month. Even metals associated with internal combustion engines (ICE) have maintained their upward trajectory as palladium and rhodium gained 12% and 13% during the month. Chinese demand for certain agricultural commodities as a well as lower than expected production in the US has led to a sharp increase in prices with the S&P GSCI Agriculture Index rising 15% during the month.

Though demand for oil still remains depressed due to limited international travel, it is showing signs of increasing as economies have slowly reopened. As such we have seen the price of Brent crude continually edge higher and for the month it rose 6% closing at $67 a barrel. Since it broke the $2,000/ozt level last year, the price of gold has been on a downward trend even falling below $1,700/ozt. The rollout of the vaccine and its expected positive impact for the economy has led to investors shifting more funds into equities to the detriment of gold. In addition, rising bond yields make the yellow metal less attractive as it does not provide an income return. However, recent demand for bullion by various central banks as well as consumers in India led to the price of gold ending the month at $1,768/ozt, an increase of 5%.  

The increase in commodity prices is expected to flow through into the manufacturing cost of goods which in turn will lead to higher prices. Combine this with the surplus cash currently sitting in bank accounts courtesy of government fiscal spending and you have a perfect storm of ingredients for higher inflation. While an increase in inflation over the short term is more likely than not, it may well be transitory in nature. For starters, the surplus cash that would go towards relieving pent-up demand, specifically on services and travel is likely to be a once-off event rather than a sustainable trend. There are also structural forces at play which have led to lower inflation and are likely to persist. These forces include aging populations and technological innovations. Advancements in technology lead to efficiency gains which in turn should be deflationary in the long run.  

The local equity market continues to push higher as the JSE All Share Index returned close to 2% for the month. Gains were once again underpinned by companies benefiting from higher commodity prices with particular strength shown by diversified miners Anglo American and BHP as well as the likes of Kumba Iron Ore and Sasol. The gain in the JSE All Share Index was however pared back by the underperformance of Naspers during the month. Through its subsidiary Prosus, the internet and media group reduced the size of its stake in Tencent to 29% while investors continue to grapple with management over how it intends to unlock value for shareholders.