STRONG TAILWINDS HELPING CYCLICAL STOCKS
Sector rotation continued last week as the end of the pandemic drew closer, reflected by continuing progress in vaccination campaigns and fears of inflation. Investors generally dumped tech and moved into more humdrum, lower-multiple sectors such as banking or more cyclical spaces such as oil & gas and industrials – which had earlier been hit by social distancing measures. The cyclicals-dominating European stockmarkets correspondingly turned in a solid performance, gaining by more than 4% over the week. In Switzerland, small and mid caps continued outperforming the blue-chip SMI index, pinned back by the latter’s pharmaceutical heavyweights. New controls due to be introduced by Beijing to regulate fintech companies, in particular its offensive against Tencent (an internet and payment solutions colossus), triggered some profit-taking on Chinese tech stocks.
Higher long-term interest rates – as illustrated by the yield on the 10-year US Treasury creeping up to 1.63% – are still causing some unrest and stoking fears that the ultra-loose monetary policies will end sooner than expected. Because debt burdens have mushroomed in recent times, the world is ill prepared for a possible increase in borrowing costs. This prospect has in turn triggered a mood of panic surrounding corporate bonds, technology stocks and certain emerging markets. But investors should also remember that stronger economic growth also lifts company profits.
Additionally, Fed chief Jerome Powell recently repeated his mantra that the US economy is still far from full employment and the higher yields are more a reflection of solid growth prospects rather than runaway inflation. A world of difference exists between the Fed’s projections, i.e. no rate hike until 2024, and the market’s forecasts. In February, the consumer price index rose by only 1.7% year on year. Moreover, according to Janet Yellen (Treasury Secretary), the approved USD 1.9tn stimulus package is unlikely to rekindle inflation simply because there is still so much unemployment around. All eyes are therefore fixed on the outcome of the Fed meeting this coming Wednesday, 17 March.
Faced with the risk of tightening financing conditions, which would throw the economic recovery off course, the ECB as expected kept rates unchanged when its governing council last met. However, it did accelerate the pace of bond purchases for the coming quarter as part of its EUR 1.850tn pandemic emergency purchase programme (PEPP), which came into being almost a year ago.
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