US, UK, and European markets trended upwards this week, with investors looking past mixed economic data releases and pandemic data to welcome positive earnings updates and greater clarity surrounding geopolitical developments. Despite the highly volatile and turbulent market conditions experienced over the past 18 months, US and European equity markets are largely at all-time highs as of writing, demonstrating investor appetite for risk assets at this stage of the economic cycle. We remain optimistic that the positive momentum in equity markets will continue, despite short term uncertainty.
Having reached monthly lows in mid-July due to fresh concerns over the Delta variant alongside Beijing’s recent regulatory crackdown, US, UK, and European indices posted their second week of consecutive gains as positive investor sentiment outweighs macroeconomic headwinds. In the UK, falling Covid-19 case numbers, where the seven-day average case rate currently sits 46% below the July peak, led to optimism that the UK’s third wave of Covid-19 cases could be coming to an end. US and European cases, on the other hand, have been on the rise over the past month, yet markets have generally looked through this as they remain hopeful that national case numbers could replicate the trend that has taken place within the UK.
Aside from the pandemic, corporate earnings have generally met or surpassed expectations across the Western nations, as investors continue to view equities favourably despite the uncertain macroeconomic landscape. According to Factset, 88% of the US’ 500 largest companies that have reported their Q2 earnings have reported positive EPS and revenue surprises, and equities across the board are now trading on more attractive valuation multiples given forward-looking earnings. With investor and corporate clarity surrounding the pandemic improving, equity return potential looks increasingly attractive given yields remain at, or close to, their six-month lows.
In Asia, equity indices have gained this week, despite Beijing extending its regulatory crackdown on those firms that it views have exacerbated inequality within China. As highlighted in the attached update, the prioritisation of social stability and national security over investor interests had led to a rapid repricing of Chinese equities, with foreign investors speculating that more sectors and industries could face stricter regulation moving forward. With that being said, other investors have seen the drop in equity prices as an opportunity, where they note an overreaction from shareholders as increasing the attractiveness of Chinese asset valuations. Although markets accept that the regulatory crackdown could persist for some time, some believe that Chinese equity prices could bounce back later this year once markets have a better understanding of China’s long-term intentions. Outside of China, Japanese equities have remained flat, as the spread of the Delta variant has led to investors considering whether the economic recovery could be delayed.
For more information on China’s regulatory crackdown and its domestic developments, please refer to the Market Update.
In line with the improvement in equity markets, the OBI portfolios have strongly performed this week relative to the benchmark. The OBI 5 to 8 portfolios all posted attractive gains given their higher equity weightings, with our Asia and European exposure performing particularly well due to regulatory clarity and earnings optimism. OBI 3 to 4, our defensively positioned portfolios which currently have between 25% to 35% equity weightings, also performed positively this week, eclipsing their annualised return targets in the year-to-date timeframe.
As has been the case over recent months, macroeconomic headwinds have added turbulence to financial markets, and this is likely to continue to impact risk assets in the short term. However, the positive momentum of equity markets as a result of improving company fundamentals, geopolitical clarity, and rising vaccination rates will likely support the outlook for risk assets in 2021 and beyond. We remain confident that the OBI portfolio strategy will continue to seize opportunities across the globe as they arise, and we expect all six OBI portfolios to meet or exceed their annualised rate of return targets by the year end.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
Although the economic outlook remains positive, it is important to note the changes to economic data flows that are beginning to take place. Last week, advanced US GDP data for Q2 2021 came in slightly lower than expected, while slightly softer US manufacturing data this week has led to some investors considering that economic growth could be slowing. Although we see that some data flows have come in below expectations, we are aware that short-term uncertainty caused by the pandemic and other macroeconomic risks are likely to be affecting monthly data flows. After a rapid improvement in economic data over much of 2021, it is reassuring that recent data has come in slightly below expectations, as it alleviates some of the concerns over an overheating economy while increasing the chances of a sustained recovery over the coming 12 months. Considering this, we continue to see global vaccination rates, favourable policy and improving economic fundamentals as key drivers for performance in the coming months.
Key Events We Are Watching This Week:
- This week’s earnings releases as the Q2 earnings season comes to a close.
- Wednesday 11th: Germany, Italy, and US Inflation Data
- Thursday 12th: UK GDP Growth Rate
This Day in History
On this day, in 1966, The Beatles release single “Yellow Submarine” with “Eleanor Rigby” in the UK.
Thank you for reading, have a great week!
Jason, Gina & Ben
