Investment Comment March 2021

In February, optimism surrounding the global vaccine rollout and renewed inflation expectations combined to drive up bond yields and cyclical stocks. This came at the expense of previously favoured growth equities, some of which suffered their worst month since last March. Global equity markets trailed downwards toward the end of February, while commodities rallied, with copper, nickel, and iron ore gaining substantially in the month.

February was another volatile month for US equities. The MSCI US index was initially up as much as 4% in mid-February but ended the month down 1.40%. Markets were once again roiled by retail traders, as Gamestop doubled at the end of February after trading sideways for most of the month. In large cap stocks the decline was primarily driven by sell-offs in the bond market, implying that investors see higher inflation on the horizon as lockdowns ease. Growth stocks were hit particularly hard, with the likes of Tesla, Peloton, and Nvidia leading the declines. The episode is reminiscent of 2013’s ‘taper tantrum’, when bond and equity markets went into a tailspin on expectations that the Federal Reserve would restrict quantitative easing and raise interest rates.

President Joe Biden began a review of strategically important supply chains, with a particular focus on semiconductors, battery technologies, and pharmaceuticals. Withdrawing from global supply chains to focus on domestic development signals a continuation of some of the trade policy pursued by Donald Trump. The House of Representatives also passed a long awaited $1.9tn stimulus plan aimed at restarting America’s post-pandemic economy, with a focus on infrastructure and green investment.

The MSCI Asia Pacific ex Japan index declined 3.66% in February as last month’s rally lost steam. Chinese equities led the decline, spurred by hawkish comments from the People’s Bank of China. The Communist Party has of late identified ‘financial stability’ as a key area of concern, intertwined with their efforts to prevent private companies building up power in the fintech space, such as with Jack Ma and Ant Financial. Following this theme, the central bank has proposed an e-Yuan, a cryptocurrency based on antithetical principals to mainstream crypto like Bitcoin; it will be centralised, monitored, and undermines the payments systems established by Alibaba and Tencent.

It is feared that the global semiconductor shortage will hold back automobile production this year.  Home to the largest contract chipmaker, Taiwan Semiconductor Manufacturing Company, Taiwan has been touted as capable of solving the supply issues in the industry. However, recent discussions between the Taiwanese and German government to try and resolve the shortage run counter to China’s demands that other nations deny Taiwan recognition of its de facto independence.  A coup in Myanmar showed that despite the region’s recent stability, pockets of unrest remain, as protests in Thailand and Hong Kong recently illustrated. The Asia Pacific region is vast and contains economies as diverse as Myanmar, whose GDP per capita is $1,400 and South Korea, with a GDP per capita $31,000.

European equities finished slightly down on the month (-0.98%) but fell less sharply than other markets. Mario Draghi’s confirmation as Italian Prime Minister led to a wave of optimism that the country’s political dramas may be coming to an end. Draghi led the European Central Bank through the 2012 European debt crisis and is seen as a competent steward of Italy’s share of the European Recovery Fund. Spreads between German and Italian 10-year bonds, seen as a critical indicator of Eurozone cohesion, fell below 1%, the lowest level in five years. However, the disparate ideologies of the coalition Draghi assembled may make decisive political and economic action more difficult.

UK equity markets were a top performer in February, as the MSCI UK Index rose 0.89% on hopes that the country will reopen before other economies. Sterling continued to rally, after Boris Johnson set out the steps for the UK to exit lockdown. Sterling tested levels last seen before the Brexit vote in 2016. The currency was at $1.42 in late February, up from $1.15 in March 2020. Travel stocks also jumped on the announcement, with the likes of Tui, easyJet, and Carnival, the cruise operator, rebounding strongly in late February.  Still, the effects of the third lockdown continue to manifest in job losses with unemployment breaching 5% for the first time since 2015. Elsewhere, housing markets received another boost in the form of a stamp duty holiday extension.

Emerging Markets led equity market declines in February with the MSCI EM index declining 3.82%. Although there were disparities in performance between the constituent countries, the equity and bond markets decline in Emerging Markets were broadly reflective of investor concern over another ‘taper tantrum’. During the 2013 episode, a rise in international borrowing costs triggered widespread Emerging Market volatility. India, one of the largest constituents of the MSCI EM index, did however fare well in February owing to government announcements of higher spending, bank privatization and protective tariff increases.  As well as the fiscal initiatives, the Indian government also implemented new social media censorship rules. Now, if the social media titans plan to continue their expansion in this key growth market, it appears they may have to compromise their principles of free speech and privacy.  In Brazil, Bolsanaro’s attempts to interfere in the domestic fuel market through the dismissal of Petrobras CEO, Roberto Castello Branco, proved damaging to equity markets and the Brazilian real. Yet, some of the confidence lost in the economy, particularly monetary policy, was restored through the long-awaited legislation to grant autonomy to the Brazilian central bank.

The main development in markets this month was a sell-off in bonds as yields and inflation expectations rose. However, in the context of a bull run in bonds and the exceptional actions taken by central banks in 2020 that suppressed yields, the rise in yields is still small. With a clear path to normalization and exceptional monetary and fiscal spending, some believe reflationary pressures will build up and that in time the Federal Reserve and other central banks will be forced to raise interest rates. Cantab remains cognisant of inflation and we incorporate it into our analysis. February’s market conditions remind us that as always, diversification is key, as concentrating capital in one sector can lead to a buildup and subsequent unwinding of risk.

Risk warnings
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.