Financial Blog

Offshore Equities markets performed relatively well despite the onslaught of the Pandemic in 2020. Superior returns were realized by US and North Asian Stock markets that carried the performance of our Feeder Funds. The US incurred the largest number of Covid cases, and also experienced a difficult political campaign period and transitioning, but its S&P 500 Index still generated decent double-digit returns. China also was able to provide solid Equity returns as it regenerated its economy faster providing anchor support to some Asean neighbors that benefitted from the supply chain relocation on trade. These countries managed the Covid pandemic more effectively and efficiently that despite new waves of virus spread, they were able to effect the correct policies, across medical, fiscal and monetary aspects, which allowed them to re-open their economies earlier.

This exceeds some economists’ expectations and it’s a number that will keep improving as vaccine production ramps up. Developed Markets is now on track to reach 72% vaccine coverage of the population with a significant acceleration in the UK while President Biden doubling the US target to 200mn doses for his first 100 days in office. The EU as a whole improved as well, but Germany, France, Poland and the Czech Republic declined. On the other hand, there are still about 40 to 50 economies that need to start vaccinating. We observe that in countries with over 20% of the total population vaccinated (i.e. UK, US, Israel, UAE), both infection and mortality were under control regardless of vaccine type, allowing a return to normalcy. While Israel provides a large sample of vaccination from Pfizer-BioNTech, UAE has distinguished itself with large vaccinations of Sinovac and later expanded to included other vaccines such as Russia’s Sputnik, Pfizer-BioNTech, and AstraZeneca. UAE has administered 73 doses per 100 people (vs US, UK, Israel: 36, 44, 112) and daily cases of infections/deaths are down ~2,000-3,000/~5 to 20, respectively. This early date suggests that vaccination provides protection, allows re-opening, and perhaps lowers infection rate, regardless of the vaccine type.

What does this mean to global stocks? We remain quite constructive given the backdrop on the strong fundamentals that underpin the market: strong global growth, recovery and reopening from the pandemic, strong monetary and fiscal policy stimulus, a strong consumer that is expected to unleash pent-up demand, and still moderate equity positioning. The recent market volatility was largely due to market rotation out of high momentum and expensive growth stocks alongside an adjustment in rates and inflation expectations and should subside going forward. An online survey of 1,000 consumers across the US was conducted by UBS which showed that an overwhelming majority of respondents expect to increase spending (52%), with 32% expecting to increase expenditures by over 10%. On an income-weighted basis, the survey results point to an over 7% jump in total spending, which supports most economists’ forecast for very strong consumption growth in 2021. Over 70% of S&P 500 companies beat 4th Quarter EPS estimates while over 60% beat sales estimates. The positive environment in the US should also benefit European and Asian markets. Over 60% of Stoxx600 members, which comprises 600 large, mid, and small companies among 17 European countries, beat EPS estimates for the 4th Quarter. Meanwhile, the Asia Pacific earnings environment remains healthy as analyst upgrades continue to outnumber downgrades over March. Sectors that continue to be in favor across all markets include value, cyclical and small-cap stocks.

Due to the Covid-19 pandemic in 2020, central banks and governments aggressively stimulated their economies. The likely result of this aggressive stimulus is rising inflation and accelerating global growth. According to the International Monetary Fund (IMF), global growth is expected to rise by 5.3% this year after falling by 3.5% in 2020. Global growth will be driven by the US as the country begins its rollout of nearly $2 trillion in government support. This support package includes $1,400 payments to individuals, extending emergency assistance to the unemployed until early September, and providing billions of dollars in relief to state and local governments. Economists continue to raise estimates for 2021, as as they’re looking for a huge rebound this year, and now believe that these relief measures will boost US GDP in the 1st Quarter to 5% or higher. They are forecasting growth for the entire year of around 6%, which will be the strongest performance since 1984. On the other hand, the European Union announced their own $2.2 trillion budget and a stimulus package that aims to help countries repair economic damage from the pandemic. Optimism over the economic recovery lifted most asset classes especially commodities, which has gained over 30% in one year, as measured by the Bloomberg Commodity Index. Investors need to prepare for a world of rising yields after a long period of structural decline. The US 10-year treasury yield has increased from 0.9% as of the end of December to nearly 1.60% currently.

Nevertheless, we believe that there is a cap on how high rates can go as the Federal Open Market Committee (FOMC) members did not change their forecasts for interest rates until 2023 despite increasing GDP and inflation forecasts for this year. By leaving the median dot at zero hikes through December 2023, the FED underscored its decidedly dovish approach to monetary policy. One reason that the FED did not change its outlook for monetary policy is that it does not target gross domestic product (GDP), nor does it target outcomes for this year. Instead, the FED’s mandate requires it to focus on labor markets and inflation over the medium term. Fed Chair Jerome Powell mentioned several times that the labor market remains significantly distressed. Payroll jobs are still 9.5 million lower than pre-pandemic levels, the prime-age participation is still 3% lower and millions of workers report that they have been “permanently” laid off.

More recently, the high-frequency indicators around the world have indicated that global growth this year won’t be a straight line as more countries faced new Covid-19 waves and some mobility restrictions were reintroduced. The development and the distribution of Covid-19 vaccines is the closest thing to a silver bullet that will bring about a rapid acceleration of economic activity as health risks are mitigated and mobility returns. Globally, we are now on track to inoculate 36% of the population in 2021.

One should avoid the mistake of most investors of home country bias. Home country bias refers to investors’ tendency to favor companies from their own country over those from other countries or regions. When building your portfolio, it is always best not to put all your eggs in one basket – which in this case means not to put all your investments in the local Philippine market. This increases the ability to diversify risk by allocating across regions and asset classes thereby reducing local market concentration. In the long run, an investor may just find higher returns than if you have invested your savings all in one place locally. A prudent investor should divide his investments between both international and domestic equities as this would mitigate losses should one market increase and the other decrease. The key to diversification is buying uncorrelated assets that will allow you to generate higher returns at reduced risk. Harry Markowitz, who won the Nobel Memorial Prize in Economics, said that “Diversification is the only free lunch in investing.”