Investment Comment May 2021

Covid-19 showed no sign of leaving international headlines in April, one year on from the first full month most European countries spent in lockdown. India, in particular, bore the brunt of a resurgence, leading to intense pressure on hospitals. By contrast the UK, US, and many other countries continued to make good progress in vaccinating populations. There were other signs for optimism in developed markets with first quarter corporate earnings rebounding and consumer and business confidence indicators trending higher across the globe.

The MSCI US index climbed 3.95% in April, as US technology stocks posted record quarterly earnings, far surpassing even bullish analyst expectations. Apple, Microsoft, Alphabet, and Facebook all posted double digit revenue and profit gains compared to the same quarter in 2020. President Joe Biden made historic agreements aimed at tackling climate change in April. In order to align US emissions with the Paris 2015 Climate Agreement, Biden pledged to halve US greenhouse gas emissions by 2030. Most notably for international markets, the US and China committed to work together and with other countries to tackle the crisis. While the two superpowers remain antagonistic towards one another in many areas of the economy, this move signalled a willingness to look past Trump-era blanket hostility. Biden also revealed a $1.8trn expansion of social support for poor Americans, funded by a tax raise on the wealthiest. The American Families Plan will focus on education and childcare, with $1trn allocated in spending and $800bn in tax cuts or reductions. Increases to Capital Gains Tax and the top rate of Income Tax have been touted as the likely sources of funding for the Plan.

The MSCI Europe ex-UK index rebounded strongly in April, up 3.69%. European countries emerged from lockdown towards the end of the month, with France and Italy tentatively removing the harshest restrictions on movement. At the same time, European countries looked to agree on spending plans for the Covid-19 recovery package; agreement hinges on how Mario Draghi and the Italian Parliament plan to spend their €220bn allocation. The European Parliament also approved the Brexit trade deal struck in December 2020, ending almost 5 years of negotiations. The European Union and governments across the continent will now focus on vaccinating the population, and on the economic consequences of a year of intermittent lockdowns. At the end of April, however, the Eurozone officially entered a recession again as it posted two successive quarters of GDP declines. Germany led the declines as GDP decreased by 1.7% in Q1 2021, with France being the only large economy to register a rebound, albeit only 0.4%.

The MSCI Asia Pacific ex-Japan index edged up 0.66% in April, although India weighed on the index. The country witnessed Covid-19 cases soar to over 350,000 cases reported per day. Even so, the true total is believed to be understated, as the country’s reporting system does not cover the entire country. The US, China, and EU all pursued vaccine diplomacy by pledging to send doses to the country. The Indian government also blocked the Serum Institute, one of the world’s largest manufacturers of Covid-19 vaccines, from exporting certain shipments, which is expected to disrupt rollouts across the world in the coming months.

Emerging Market equities rose in April, as the MSCI Emerging Markets index posted a 0.86% gain, despite fresh outbreaks in economies already reeling from the first wave. In China, super app Meituan was the second company to be ensnared in Beijing’s antitrust crackdown on technology companies. Regulatory scrutiny has therefore widened beyond Jack Ma and Alibaba, who previously attracted attention for criticizing state banks and China’s regulatory landscape. The alleged charge is ‘choose one of two’ behaviour, in which apps force customers, developers, and even other businesses to choose which platform to operate due to superior economies of scale and reach. Despite this, Chinese stocks performed well, as fines for Alibaba were considered moderate and regulation not particularly onerous.

UK equities performed strongly in April, up 3.69% on hopes that the heavy weighting to cyclical stocks would benefit from easing of lockdown restrictions. While the United Kingdom made swift progress in vaccinating its population and reopening the economy, the Prime Minister and Government became embroiled in two controversies regarding disclosure of funding and access to Coronavirus support loans. Early surveys conducted in non-essential retail indicate pent up demand from shoppers, with Virgin Money recording a 25% increase in credit card spending since stores reopened in April.  There were also signs of a reversal in grocery shopping consumption with online order growth slowing and bricks and mortar supermarket sales rising 4.6% in April. Meanwhile, consensus forecasts for 2021 unemployment have been revised down significantly to 5.9% from the rather bleak 7.4% initially predicted in September 2020. The economic growth outlook is also much improved with leading economists now expecting growth of 5.4% this year, ahead of the previous 4.2% forecast.

Japan was the global laggard in equity markets in April, as the MSCI Japan declined 1.89%. Japan further struggled to combat anaemic inflation data, as household spending declined in the face of the pandemic. The Bank of Japan forecasts inflation to be 1% in 2021, short of the 2% figure that has eluded policymakers now for a generation. Corporate Japan was rattled by a takeover attempt of Toshiba by US private equity firm CVC. A split board, a chief executive resignation, and the eventual breakdown of the deal may signal that the usually staid Japanese boardrooms will be shaken up by the entrance of private equity buyers. Japan’s relatively cheap equity valuations combined with an abundance of conglomerates that may have more value as individual companies, and a government policy of corporate reform, mean that Japan may become a magnet for private equity buyers in the future.

Developed markets performed strongly in April. Successful vaccine rollouts in the UK and US, bumper earnings for many companies in Q1, and a resurgence in European cyclical equities combined to generate positive sentiment in developed markets. However, Emerging market economies were buffeted by renewed outbreaks and variants of Covid-19.  At the one-year mark of lockdowns in Europe and the USA, it is worth reflecting on the rapid deterioration and subsequent strong rebound of equity, commodity, and bond markets. Diversification in investment style, geography, and asset class have been crucial to the resilience of Cantab portfolios during this period.

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.