In April, expectations for spectacular economic growth turned from forecast to fact, as the reopening of economies lifted developed market economic data. Markets spent much of the first quarter of the year positioning for such developments and, as such, faded the fact, with 10-year Treasury yields falling back from their March peak of 1.75% to 1.53%, before ending the month at 1.63%.
Equity markets had another strong month with developed market equities returning 4.7%. Beneath the headline indices, the rotation trade from growth to value took a breather in April, with growth stocks returning 6.3% and value stocks 3.2%. Regionally, the S&P 500 led the way, returning 5.3% on the month, while more cyclical markets such as the MSCI Europe ex-UK and the TOPIX in Japan lagged, returning 2.1% and -2.8%, respectively.
Exhibit 1: World stock market returns
Covid-19 vaccine rollouts in the US and UK have continued to proceed well, with 44% and 51% of their respective populations now having received at least one dose, allowing for what looks like the start of a sustained reopening of their economies. In continental Europe, after a difficult start to the vaccine campaign it’s been encouraging to see that the pace of vaccination has accelerated significantly. Prospects for vaccine supply have improved, and by the end of April, the daily rate of vaccinations in major euro area member states had reached between 0.6% and 0.8% of the total population.
Emission reduction targets moved back into the spotlight in April with a wave of new commitments. The UK announced it would target reducing emissions by 78% by 2035, relative to 1990 levels, while President Biden announced the US would target a 50% reduction by 2030, relative to 2005 levels. China’s premier, Xi Jinping, also said that China’s coal consumption would peak in 2025. We think that these recent events serve to underscore that climate policy is one area where economic rivals can find common ground and our recent release, “Achieving net zero: The path to a carbon-neutral world,” explores the multi-year policy and investment implications.
Exhibit 2: Asset class and style returns
President Biden’s first 100 days have now passed and the key takeaway for investors is that this president is not afraid to spend big. Following the passage of the American Rescue Plan – a USD 1.9 trillion stimulus package passed in March – the president has outlined his plans for two more spending packages. The USD 2.3 trillion American Jobs Plan is designed to invest in the country’s infrastructure, while the USD 1.8 trillion American Families Plan will aim to ensure a more equitable recovery, with many key tax credits from the Rescue bill being extended or made permanent.
The plans outline proposals to increase the corporate, top marginal income, and capital gains tax rates in order to pay for the spending. While the passage of the Rescue plan through Congress was fairly straightforward, these further plans are likely to be more contentious. It is likely that compromises will need to be made on both the spending and taxation proposals in order for the bills to pass.
With the vaccine rollout proceeding well and Covid-19 cases broadly under control, the US consumer has started to make up for lost time as the economy reopens. Consumers are feeling more confident, having saved about 8% of GDP in 2020 above what households normally put away, combined with the USD 1,400 stimulus cheques from the Biden administration. The Conference Board’s measure of confidence rebounded sharply from 109.0 to 121.7 in April. Our latest piece, “It’s getting hot in here: Growth and inflation are heating up,” takes a closer look at the growth implications of these huge excess savings.
This setup means that we are entering a period in which economic data will be exceptional – the US economy grew at an annualised pace of 6.4% in the first quarter and the pace of growth should accelerate from here. US retail sales grew 9.8% in March alone, and now sit 17% above the pre-pandemic level. Unsurprisingly food services & drinking places and clothing stores – two categories that have suffered most from the pandemic – saw some of the largest gains.
The pace of job growth is also accelerating – March saw 916,000 jobs added and the unemployment rate fell to 6.0%. But the Federal Reserve (Fed) chairman, Jerome Powell, was keen to stress at the April meeting that it will still be “some time” before the Fed sees “substantial further progress” towards its goal of maximum employment – one of the key criteria for the Fed to begin tapering its asset purchases.
The biggest question for markets in the second half of the year will be to what extent the rise in inflation is “transitory,” as the Fed has pre-emptively labelled it. The US Consumer Price Index (CPI) rose more than expected in March, increasing 0.6% month on month (m/m), while the core index increased by 0.3% m/m.
Exhibit 3: Fixed income sector returns
European countries have struggled to varying degrees to get on top of recent Covid-19 outbreaks, but cases in the region are heading in the right direction. The acceleration in the rate of vaccinations is welcome and gives us confidence that the economic recovery can begin in earnest in the second quarter, with peak growth expected in the third quarter as restrictions are loosened. In the meantime, the region should benefit from the increased demand for exports to the US, which account for 3% of eurozone GDP.
The eurozone economy contracted by 0.6% in the first quarter, but despite ongoing measures needed to contain the virus, there are signs that the economy has begun to grow again in April. With a return to normality in sight, consumers are feeling more optimistic and April’s measure of confidence rose more than expected. Spending has also proved resilient through the difficult winter with retail sales for February just 2.9% lower than a year ago.
Inflation remains more muted in the eurozone. Estimates for April showed that headline inflation rose to 1.6% year on year (y/y) but the core measure remains subdued at 0.8% y/y. The European Central Bank president, Christine Lagarde, indeed acknowledged that the eurozone and the US are on different pages when it comes to the economic and inflationary outlook and, as such, the ECB would not be acting in tandem with the Fed – a nod that the tapering of its bond purchases will likely be slower.
As in the US, Britons are starting to get out and enjoy themselves – retail sales excluding auto fuel rose 4.9% in March. Both the manufacturing and services PMI surveys came in above 60 for April indicating that the economy is rapidly growing. It has also been encouraging to see that Covid-19 cases remain at a low level, despite the relaxation of some restrictions. Now that an estimated 70% of adults have antibodies against the coronavirus, the UK should be on a sustainable path to reopening.
Exhibit 4: Fixed income government bond returns
The Chinese economy continues to normalise. In the first quarter of the year it grew 0.6% quarter on quarter with a more balanced split across sectors, as activity in services continues to improve. Looking forward, domestic consumption is expected to be the major growth driver as fiscal and central bank authorities become more balanced in their policy support, which could lead to a deceleration in local government financing and infrastructure investment.
The Covid-19 health crisis in India tragically worsened in April, underscoring the need for successful vaccination rollouts to be urgently broadened out to the emerging world. Pressure on the health infrastructure has intensified and case fatality ratios have more than doubled since mid-February. Testing positivity ratios remain at an alarmingly high level of around 20%, leading states to continue imposing restrictions. As a result, levels of mobility have fallen back and the economy may now contract in the second quarter, pushing back the economic rebound until the second half of the year. While the near-term outlook is clearly challenging, the structural growth story remains intact, as we outline in our article “Asia’s decade: Getting ahead of the growth opportunity.”
The developed world looks well on the path to recovery and the coming months should see spectacular economic data. All eyes will be on the degree to which inflationary pressures are as transitory as central bankers are flagging, or whether the growth impetus leads to more persistent price increases. Policymakers have worked tirelessly to provide enormous support to financial markets over the last year. The challenge now for central banks is to convince markets that they will continue to provide support, even when the global economy is booming.
Exhibit 5: Index returns for April 2021