Second quarter market review | Calamatta Cuschieri

Equity markets continued the upward trajectory in the second quarter, as vaccination campaigns continued to acclerate in most developed economies, especially in Europe, which is now catching up with the UK and the US.  In contrast, emerging economies continued to lag on the vaccination front but cases seem to have peaked in India where number were running at dangerously high levels a couple of weeks ago. 

The yield on the 10-year US Treasury dropped by 30 basis points over the three month period to settle at 1.44% at the end of June.  This decline helped growth stocks to stage a rebound, ouperforming value stocks in the interim.  This was evident by the performance of the tech heavy Nasdaq Composite Index which outperformed the broader S&P 500 Index by over 1%. 

Meanwhile, governments in most developed markets continued to ease Covid-related mobility restrictions and activity levels picked up. Economic data over the last three months has generally been very strong, especially in the US, which posted an annualised growth rate of 6.4% in the first quarter.  This followed a 4.3% expansion in the first quarter with analysts now expecting a considerably stronger 9% growth in the second quarter.

Although the eurozone economy contracted by 0.6% in the first quarter, leading economic indicators, such as the purchasing managers’ index (PMI) business surveys, have reached multi-year highs in many regions. These indicators point to a strong economic rebound having taken place in Europe in the second quarter.

Global growth is expected to remain strong in the second half of the year. However, the reopening of economies and the quick rebound in activity that has followed has fueled inflation in some countries. In May, the US consumer price index increased by 5.0% year on year, although some of the underlying details suggest that there are temporary factors at play, such as the rise in used car prices. While the Federal Reserve continues to see this inflation increase as transitory, it has become slightly more hawkish, acknowledging that tapering is being discussed. The median Federal Open Market Committee participant also now expects two rate hikes sometime in 2023, up from no rate hikes just three months ago. Whether or not inflation is transitory remains one of the biggest questions for investors so far this year.

At a regional level, the S&P 500 delivered the best return (+8.2%) last quarter, thanks to the rebound of growth stocks, strong first-quarter earnings growth (47% y/y), and the prospect of more fiscal stimulus as Joe Biden reached a bipartisan deal to boost infrastructure spending by USD 600 billion. European stocks followed at a distance (+3.7% for the Euro Stoxx 50), supported by the reopening of regional economies and strong global goods demand.

While the spread of the delta variant is a potential concern, as it could slow the full reopening of economies, the increasing number of cases has so far not led to significantly higher hospital admissions in the UK. This suggests that the vaccines work well against the variant and UK equities were still able to deliver 4.8% over the quarter. In contrast, the slow vaccination campaign weighed on the relative performance of the Japanese equity market last quarter. Meanwhile, policy tightening and regulatory concerns have weighed on China’s relative performance and on Asian indices as a whole.

Within fixed income markets, investors’ search for yield and inflation hedges against a backdrop of low sovereign bond yields and higher inflation, turned to spread products such as emerging market debt, US investment grade credit, and US and European high yield, as well as inflation-linked bonds.

Overall, the outlook for near-term global growth remains strong. As the bounce from pent-up consumer spending fades, we expect government and business spending to pick up the baton. While the second half of the year could be bumpier for financial markets, equity markets should continue their upward path. Inflation worries are likely to contribute to market jitters, but it will take a lot of bad news to shift the central banks towards a more rapid withdrawal of easy money. Finally, the recent underperformance of Asia and China, due to worries over policy tightening and vaccine progress, should prove to be temporary and the structural case for Asia remains intact.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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