#Articles — 09.04.2021

Equities Focus

Edmund Shing, Global Chief Invesment Officer & Alain Gerard, Senior Investment Advisor, Equities

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  1. Implied volatility is resetting, lower: the VIX volatility index has broken down through the 20 level, highlighting lower risk sentiment and the bullish outlook for global equity markets.
  2. STOXX Europe index hits record high: the STOXX Europe index breaks definitively through long-term resistance, underlining the strong upwards momentum in cyclical stock  markets. We reiterate our preference for the UK, eurozone and Japanese equity markets.
  3. Steeper yield curve can coexist with higher equities: the steeper US yield curve results from upwards revisions to expected US growth (we see 6.9% GDP growth this year). The drag from higher long-term rates on equities is outweighed by upwards earnings revisions.
  4. Seasonality favours the DAX, OMX, cyclical sectors: April is traditionally the best month of the year for European equities, with the German DAX, Swedish OMX and cyclical manufacturing sectors leading.
  5. Semiconductors lead Tech: the global semiconductor sector is in a very sweet spot, with structural demand growth combining with widespread supply shortages. We focus on semiconductor equipment makers as best-placed to profit from this “perfect storm”.


Global Equities view

Earnings momentum outweighs higher yields

Steeper yield curve can coexist with higher equities: note the acceleration in global growth forecasts post Biden’s USD1.9 trillion stimulus package, with potentially a further USD2.25 trillion jobs and infrastructure package to follow. The ECB are playing their part by increasing their monthly bond purchases, to calm euro yields and support domestic euro growth.

Near-term inflation worries overplayed: 10-year Treasury yields have pulled back from the 1.7% level, as high unemployment and temporary base effects should fade by late 2021. The Fed remains measured.

Implied volatility resets to pre-pandemic levels: short equity index volatility strategies are working well, as progressive re-opening both improves economic visibility and fuels strong earnings upgrades.

The UK remains a strategic choice: the depressed valuation of UK equities, combined with early April reopening of the consumer economy and a cyclical value bias make this a key positive regional view.


April is the best month for European equities

Historically, over the last 40 years April has been kind: to European equity markets, led by the more cyclical manufacturing German DAX and Swedish OMX indices. Since 1994, April monthly returns have been positive over 80% of the time for the DAX index, statistically the best month of the year, with a 2.8% average monthly return.

This is true also for Small-Caps: April has also traditionally the best month of the year in terms of performance for both European and US small-caps, with European small-caps averaging a 3.1% monthly return and US small-caps 2.6% on the same basis.

But bear in mind, “Sell in May and Go Away”: this old stock market adage does make good sense over the long term, as both May-June and August-September are both relatively poor periods for global stock market returns. September in particular is a month for defensive positioning, being the only month to record negative average monthly returns for both US and European stock markets over the long term.


We prefer Japan, eurozone, UK: Europe led the way in common currency terms over March, with the UK very attractive on a cyclical value basis. Non-UK investors can benefit from exposure to a stronger sterling.

Neutral on US exposure, given rising risks to mega-cap Tech from increasing regulation, taxation and long-term interest rates. Remember that highly-valued tech stocks are very long duration assets.


Theme/Sector in Focus

Semi equipment makers hit a sweet spot

Widespread chip shortages: a number of global carmakers including Ford, Stellantis and Nio have announced temporary plant shutdowns due to a shortage of chips for their cars.

Taiwan the new semi battleground: with Taiwanese foundry companies the focus of global outsourced semiconductor production, Taiwan has become a new strategic battleground as China strives to develop its own domestic semiconductor industry. The US is also increasing domestic production of semi chips, in order to lessen its dependence on Taiwan.

Semi equipment makers to see a strong upcycle: semi-industry investment looks set to explode over the next 2+ years as a result of these trends, with Artificial Intelligence, 5G and cryptocurrency/ blockchain development driving structural semi demand growth.

China becomes a buying opportunity

The Chinese markets saw a long overdue correction, triggered by spike in US yields, concerns over China tightening and increasing regulations on China techs.

Cyclical and structural factors are in place to drive the uptrend of domestic A-shares, Hong Kong-listed China equities, and select quality tech companies. Corrections are good buying opportunities. Fears of tightening of policy are likely exaggerated as monetary indicators remain neutral and China did not excessively loosen policy last year.

In March, Value continued to lead the way in factor terms in both Europe and the US, while Small-caps saw some under-performance after very strong performance since November 2020. We remain positive on cyclical value exposure given the strong trend of macro growth upgrades, steepening yield curves and the impressive run of earnings forecast upgrades, especially in value stocks.


Of late, the widespread semiconductor chip supply shortages have hit global technology and auto companies, with a lack of supply of graphics processors, DRAM memory and even LCD panels. Combined with the geopolitical strategic nature of this key technology sector for the US and China, semi equipment makers look best placed to benefit.

Sector preferences

Cyclicals still have potential!

Due to reassuring comments from the political and monetary authorities about inflation (and some control of long-term yields!), March has rather been a month of consolidation for the (cyclical) sectors that had been leading the last few months (energy, materials, industrials, etc).

Growth/defensive sectors (Utilities, Consumer Staples, Health Care, Real Estate) - traditionally weak in a strong economic and rising yields environment - fared better in March. Some deep value (sub-) sectors have also kept performing well (Banks, Autos, but not Tesla).

We think that the big rotation from Growth/ Defensives towards Value/Cyclicals is NOT over, especially now that Mr. Biden and the democrats are promoting their huge infrastructure plan in the US. Some leading economic indicators are at new highs!

We upgrade Semiconductors to Positive

After reaching historic peaks early 2021, Tech has been consolidating. Big Tech looks expensive but Semiconductors are attractive (we now upgrade this industry to +) due to current shortages, re-localisation and strong growth expected in the coming years (see page 3). Semis are more than ever necessary to enable new technologies such as 5G, AI, electric vehicles, etc.

In this environment of fast economic recovery, some of the best ‘hedges’ against rising yields and inflation are real assets and equities, particularly Banks (best sector correlation with rising yields). Strong Q1 banking results are expected. In addition to Semis and Financials, we like Materials, Industrials and Real Estate. Health Care (=) still provides good defensive diversification but some selectivity/stock picking is necessary. Consumer Staples and Utilities (both are rated ‘negative’) typically perform poorly during times of strong economic recovery and rising bond yields.


Cyclicals remain fairly cheap, as long as economic indicators and earnings revisions continue to rise. Defensive/growth sectors are still vulnerable due to their higher valuations. After the recent consolidation, semiconductors are attractive again, propelled by a flow of good news at both the macro and micro level.