What does the chart show?

The chart shows producer price inflation (PPI) for the US, China and Eurozone since 1995. PPI measures inflationary pressures at an earlier stage in the production process. Changes in commodity prices will directly affect this number. The key question today is whether these rises in costs will end up being passed on through the production process and result in higher retail prices paid by the consumer. As shown, PPIs have been soaring globally to their highest levels in decades. In the US, PPI rose to 8.6% year-on-year in September, with larger increases in China (+13.5%) at a 26-year high, and the Euro Area (+16.0%), the highest on record.

Why is this important?

For almost all of 2020, PPI in these regions was in negative territory as the pandemic-induced lockdowns suppressed consumer demand. More recently, price pressures have been building as a sharp recovery in demand from consumers has coincided with supply chain disruptions, commodity price increases and shortages of labour that have pushed up costs for businesses. Some of these rises in producer prices are inevitably finding their way into consumer prices: CPI in the US rose by 6.2% over the 12 months to October, and as with PPI, a key driver of the sharp rise was the energy component, up 25% over the past year, during which the crude oil price was up by 125% to October end. There is no doubt that the rise in inflation is proving to be steeper and more persistent than expected, testing the resolve of central banks to stick to their ‘transitory’ view of inflation.

What does the chart show?

The chart shows the expected earnings per share (EPS) (red line) and share price (blue line) for the MSCI World Growth index relative to the MSCI World Value index. An upward sloping line means growth is outperforming value and downward sloping means value outperforming growth. The chart shows that at the beginning of the pandemic last year, the EPS and price of growth companies soared relative to value companies but more recently, we have seen a decline in the relative EPS while the relative price has been following an upward trend.

Why is this important?

One topic that has been on investors’ minds during the course of this year (and the past few years) is the tug of war between value and growth. During the pandemic, value companies’ earnings were hit harder than those of growth companies – the MSCI World Growth index today has over 50% in technology and consumer discretionary stocks, many of which benefitted enormously from the stay-at-home trend, as highlighted by the increase in relative EPS and share price. Whilst the share prices of value stocks staged a big recovery through Q1 this year, more recently we can see that the relative EPS has continued to decline, as earnings within cyclical sectors have recovered but growth has again outperformed value. The divergence is curious.  One possible explanation is investors’ views on the longer term new normal in a post-Covid world, with changes in market dynamics sped up by Covid benefitting these higher growth stocks. Whilst value earnings have recovered of late, the red line remains some way off pre-Covid norms. Possibly as well, recent announcements of new lockdowns and slowing momentum in economic growth has supported strength in growth names too. Given these moves, the valuation dispersion between value and growth stocks remains very extreme, still at levels last seen at the height of the tech bubble. We continue to see a lot of opportunities in value stocks and an environment of higher growth (albeit with expectations reduced recently), higher inflation and higher interest rates is supportive for many of the constituents.

What does the chart show?

The charts show the earnings ‘surprise’ of companies within the S&P 500 (US market) by quarter since Q3 2019 (for the index as a whole, red bars) and a breakdown by sector for Q3 2021 (blue bars). The term ‘surprise’ describes the percentage difference in actual reported earnings and analysts’ estimates. A positive figure means that the average firm in the S&P 500 exceeded the expected earnings growth rate whereas a negative figure indicates that realised growth underperformed expectations. It is important to note that there may be instances where despite a positive surprise the actual growth rate may have fallen and vice versa.

Why is this important?

Earnings are a key driver of equity market performance and a large surprise to the upside can promote bullish behaviour among investors. The latest earnings season has been an encouraging one – whilst the degree of positive surprise is down on prior quarters, it has still been positive and it has been positive across most sectors, particularly in the cyclical energy and financial sectors, with the latter benefitting from the releasing of loan loss provisions set aside earlier in the pandemic. We can see from the chart that analysts have consistently underestimated earnings growth – earnings figures from the last several quarters for companies within the S&P 500 have surprised investors, testament to the resilience of many US companies. This certainly goes some way to explain the continued strong performance of the market, which has carried on into this earnings season, with the market up 6% in US dollar terms over the last month.

What this chart shows

The chart shows data from the manufacturing and services purchasing managers’ indices (PMIs) which are often used as indicators of future economic growth and an indication of broad economic health. A reading above 50 (shaded in green) suggests the sector, manufacturing or services here, is in expansionary territory, a reading below 50 (shaded in red) points to contraction whilst a reading of 50 (yellow) indicates no change from the previous month.

With the services sector heavily dependent on human interaction, the services PMIs have recovered significantly since the height of the pandemic last year and the third wave of lockdowns experienced earlier this year. Despite concerns of slowing economic momentum in recent months, PMIs have remained resolute, with only one country in our sample here below the 50 mark at present in either services or manufacturing. 

Why is this important?

Supply chain issues around the world are a demonstration of how demand has recovered from the pandemic at a faster pace than supply. This is echoed through some of the manufacturing PMI readings we have seen in Europe recently which have rolled over from summer highs. However, the US services PMI reading for October jumped to an all-time high of 66.7 from 61.9 in September and the UK services PMI rose sharply to 59.1 (its highest in three months), driven by a strong revival of economic activity.

Whilst headline economic growth may have slowed in some regions of late, weighed down by the delta variant of coronavirus and aforementioned supply chain issues, the PMIs continue to paint a positive backdrop for economic growth as we come to the end of 2021. A normalisation of these supply chain disruptions as the impacts of the pandemic progressively fade will be supportive for the global economy as we head towards 2022.

Source: Bloomberg Finance L.P., Momentum Global Investment Management.
Research Date: November 2021

What does the chart show?

The chart shows the price-to-earnings (P/E) ratio for the MSCI United Kingdom index (UK equities) relative to the MSCI World index (global equities). The P/E ratio measures the relationship between a company’s stock price and its earnings per share (EPS), giving investors a sense of the valuation of the company, or broader market, and how much investors are paying for the earnings of a business. Companies with high P/E ratios are often growth stocks and can, at times, be overvalued compared to their current fundamentals. Similarly, companies with low P/E ratios are referred to as value stocks and are sometimes considered as undervalued. Over the last five years the relative valuation of UK equities has sharply declined to sit at historic lows, indicating that they are significantly undervalued relative to developed markets peers.

Why is this important?The perceived significant economic risks of Brexit – which gave global investors easy justification to avoid the UK – continue to overhang the market. The decline in relative valuations since 2016 coincides with the EU referendum at the time and the result prompted a sustained fall in the value of sterling, contributing to a period of significant underperformance of UK shares in dollar terms. Now with lower valuations and recovering earnings, we believe the UK market offers attractive longer term prospects for investors. With its high exposure to financials, energy, materials and miners, the UK equity market is better suited to an environment of rising inflation and higher bond yields than a lot of developed market peers (as September showed), including the US whose market continues to be dominated by tech stocks. A spike in M&A activity this year attests to the attractive valuations with several companies approached by private equity buyers.

Source: Bloomberg Finance L.P., Momentum Global Investment Management. Research Date: October 2021.

Produced by Momentum Global Investment Management for professional investors.

What this chart shows

The chart shows the UK government bond yield curve as at 1st September 2021 (yellow line) and 20th October (blue line). Yield curves compare the yields available on similar bonds with different maturities. The ‘normal’ shape of the yield curve is upward sloping – indicating higher yields on bonds with longer maturities. When the economy is expanding, investors risk a rise in yields as central banks increase interest rates in response to rising inflationary pressures.

Effectively the higher yields compensate investors for tying up their capital for longer, subjecting them to more inflation and interest rate risk. In contrast, an inverted yield curve – where short-term yields exceed longer-term yields – could indicate investor expectations of interest rate cuts as the economy struggles and so they will pay a premium for a bond with a healthy long-term fixed income. This results in long-term government bond prices rising and yields falling, sometimes to below the corresponding yields offered on shorter-dated bonds. Since early September we have seen a significant shift higher in the yield curve. 

Why is this important?

Markets have responded to recent hawkish signals from the Bank of England (BoE) with governor Andrew Bailey stating that the central bank “will have to act” in order to control inflationary pressures, suggesting he believes they might be less transient than first thought several months ago. His comments sparked a sell-off in government debt, sending yields higher and the moves were particularly sharp for shorter maturities - the two-year gilt yield has climbed 0.49% since 1st September.

Recently released CPI for September of 3.1% came in slightly slower than August, but this seems to be a temporary respite as one of the government’s stimulus programmes last year, Eat Out to Help Out, saw prices rise in September 2020 and it now falls out of the year-on-year calculations. Recent fuel, energy and food price increases are yet to enter the calculations either. There are now increasingly higher expectations for action to be taken this year, with the UK likely to become one of the first major central banks to raise interest rates following the pandemic. These potential interest rate rises could pose an additional headwind for consumers and homeowners on top of recent higher energy prices and looming fiscal tightening.

Source: Bloomberg Finance L.P., Momentum Global Investment Management.
Research Date: October 2021

What this chart shows

The chart shows the periods of outperformance and underperformance of three MSCI global equity investment style indices and an equally weighted blend of all three investment styles (yellow line) relative to the headline MSCI World benchmark index since 1999. The style indices comprise stocks of the headline equity universe fitting the characteristics of each investment style. The enhanced value index consists of securities that exhibit higher value characteristics on the basis of a number of valuation metrics (i.e. price to book ratio).

The momentum index is invested in companies with a high degree of price momentum, constructed to capitalise on the continuance of existing trends in the market. Lastly, the quality index consists of companies exhibiting high quality traits (i.e. high return on equity or low leverage). In recent weeks it has been the quality universe that has underperformed. The quality index now has an allocation of 39% to technology stocks and their valuations have been hit by higher yields over the last month as inflation concerns have escalated. 

Why is this important?

Whilst the data in this chart only shows performance since 1999, these style indices have been shown to consistently outperform over the long-term. Interestingly, they have all delivered fairly similar returns over the whole period but have followed a different path to get there. Each style index has demonstrated periods of both outperformance and underperformance at different stages.

Therefore, a more prudent approach than riding the wave of just one investment style, and be exposed to heightened volatility, is to have exposure to multiple styles. By doing this, an investor can reduce volatility and drawdowns relative to the headline index whilst still outperforming over the long-term, building in additional diversification levers, and smoothing the investment journey – an approach that we promote and implement.

Source: Bloomberg Finance L.P., Momentum Global Investment Management.
Research Date: October 2021

What this chart shows

We’re sticking with China this week. This chart shows the price returns for the MSCI China index and the maximum drawdown the index experienced over each calendar year. Maximum drawdown reflects the greatest peak-to-trough fall over the period – the worst possible loss an investor could have made if they had bought at the peak and sold at the trough in the same calendar year. The equity market falls in China from its peak in February we exacerbated by recent tightening of regulations and the imposition of sanctions on a wide range of the private sector, souring investor sentiment and confidence, as well as the continuing spread of the delta variant.

As we touched on last week, more recently fears of default at China’s largest property developer have spooked markets. Whilst it might have felt like an extraordinarily volatile last few months, this year’s maximum drawdown (so far) of -33% is only marginally worse than the average calendar year maximum drawdown of 30% since 1993.

Why is this important?

Even during the strongest years for markets, there are always periods where markets fall. Volatility and capital loss are part of investing in any financial market and should be anticipated and that has certainly been the case in Chinese equities over time. In golfing terms, the falls we have observed so far this year really are ‘par for the course’ even though it might have felt extreme recently. There is still the risk that regulatory crackdowns continue as well as recent Covid-19 related restrictions further weighing on the growth outlook.

The Evergrande story has by no means been put to bed just yet either. Although we can’t be certain about future returns, long-term investors recognise that patience may be rewarded with strong gains. Appropriately valued and sized, investments in China offer relatively high, albeit slowing, growth opportunities, and periodic sell-offs, such as those experienced in the past eight months, can create longer-term buying windows..

Source:  Bloomberg Finance L.P., Momentum Global Investment Management. Data to 7 October 2021.
Research Date: October 2021