Looking back at the markets in Q2, global equities advanced, supported by the accelerating rollout of vaccines. As of mid-June, vaccination rates are close to 50% in the United States and Europe, and over 60% in the United Kingdom. New, more contagious COVID-19 variants are spreading, but the good news is that the existing vaccines seem effective against these as well.
The Government bond yields saw divergent performance. The U.S. and UK 10 year yields fell during the second quarter whilst the opposite was true in Europe. Corporate Bonds strongly outperformed government bonds in the second quarter.
Commodities also gained during the quarter amid constrained supply and surging global demand with energy again being the strongest component.
The economic outlook for the domestic market brightened considerably as GDP forecasts were upgraded, while the Bank of England said it was to slow the pace of quantitative easing. Defensive large cap equities were very much in favour in June, a trend amplified as sterling fell against a very strong US dollar. Healthcare, consumer staples and energy sectors performed well in June.
Owing to strong economic data supported by strong corporate earnings, Eurozone equities continued to generate positive returns during the second quarter. Many European countries saw Covid-19 infections fall over the quarter and were able to loosen restrictions on social and economic activity. The European Commission signed off on the first of the national recovery plans which will receive funding from the €800 billion Next Generation EU fund.
The second quarter was particularly strong for U.S. equities, and indeed the S&P 500 reached a new all-time high in late June. The Federal Reserve’s (Fed) rate-setting meeting brought no change to policy but its projections indicated that interest rate rises could come in 2023. This initially did not go down well with the market participants, though subsequent comments by Fed officials sought to allay any worries over raising interest rates too quickly.
Overall, the economic picture remained rosy for the U.S. Q1 GDP grew at 6.4% (quarter-on-quarter, annualised), which was modestly lower than the consensus of 6.7%. Growth in consumption was especially strong. Industrial activity as measured by the U.S. composite purchasing managers’ index (PMI) moved from 59.7 in March, to a composite reading of 63.9 in June (a reading above 50 signals expansion). Despite a sell-off in May due to higher-than-expected U.S. inflation, the emerging market equities ended the quarter with strong returns.
Looking ahead, as a lot of good news about the global economic recovery has already been factored into prices , the valuations are likely to become a drag on returns as we navigate our way through the remaining half of 2021.
As always, from all of us here at Montage, stay safe and we will hopefully see you very soon.