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Key global trends – equity rally continues
Despite still-rising COVID-19 cases globally – and signs of a tempering in the economic rebound – the V-shaped global equity recovery continued into July. The MSCI All-Country World Equity Return Index rose by 4.0% in local currency terms, after a gain of 2.9% in June.
Equity investors remain hopeful due to ongoing monetary support, tech sector resilience, vaccine hopes and avoidance (so far at least) of a return to widespread lockdowns in much of the developed world. The Q2 U.S. earnings reporting season is also, so far at least, not as bad as feared. The influence of U.S. monetary stimulus remains evident in other markets, with a further easing in the $US and bond yields during July, and further gains in gold.
As seen in the chart set below, global bond yields and the $US remain in a downtrend, and gold prices in an uptrend*. While global equities are presently above their 12-month moving average, they’ve been in a choppy broad sideways range since early 2018.
Global equity fundamentals – counting on low bond yields and stabilisation in earnings expectations
The rebound in global equities of late has largely been driven by a rebound in PE valuations, though in July forward earnings also ticked up, reflecting a stabilisation in earnings growth expectations after recent sharp downgrades.
The fundamental picture for equities remains mixed. On an outright basis, PE valuations remain well above long-run average levels, though relative to current low bond yields the market is less obviously expensive – the equity-to-bond yield gap is only modestly below the average of recent years and still comfortably above 20 to 50 year average levels. As regards earnings, there is also scope for further gains in forward earnings if there are no further downgrades to the earnings outlook for 2020 or 2021 in coming months – though this seems unlikely given the strong (30%) bounce-back still expected next year.
Key global equity trends
As seen in the table below, among key regions, emerging markets have enjoyed relatively strong gains in recent months (likely helped by a weaker $US) followed by the U.S. Technology and consumer discretionary stocks continue to perform relatively well at the sector level, while growth, momentum and quality remain the leading global factor exposures.
Source: Bloomberg. Table ordered by 6/12 month return performance for each region, sector and factor respectively. Past performance is not indicative of future performance. You cannot invest directly in an index.
These themes are reflected in the performance of BetaShares’ thematic global and Australian equity ETFs.
Among the global currency-hedged and domestic equity funds, the top relative performers remain global gold miners (MNRS), followed by Australian technology (ATEC) and global health care (DRUG). Among BetaShares’ global unhedged equity funds, the strongest performers were Asian technology (ASIA), the NASDAQ 100 (NDQ) and global robotics and artificial intelligence (RBTZ).
Cash and bonds – government yields drop, credit spreads widen
In the local bond market, overall bond yields plumbed new lows in July and credit spreads contracted further (though remaining a little above their lows earlier this year). As a result, fixed-rate bonds continued to outperform cash, especially longer-duration corporate exposures (CRED). Narrowing credit spreads also supported hybrids (HBRD) and floating-rate bonds (QPON) over cash (AAA).
Source: Bloomberg. Past performance is not indicative of future performance of the index or fund. You cannot invest directly in an index. Index performance doesn’t take into account any fund fees and costs.
*Trend: Outright trend is up if the relevant NAV return index is above its 12-month moving average and the slope of the moving average is positive, and down if the index is below this moving average and the slope of the moving average is negative. No trend is displayed in all other cases. Relative trend is based on the ratio of the relevant return index to its broader Australian or global benchmark index.
**The ranking of performance is based on an equally-weighted average of 6 & 12 month return performance.