By Jan Faure
All major equity markets made positive gains in August, again led by a strong US stock market.
The S&P 500 Index reached a record high in August, propelled by big gains in technology stocks and optimism that global economic stimulus measures will curb a prolonged economic fallout from the COVID-19 pandemic. Information technology, with the largest sector weighting in the S&P 500 index of approximately 28%, gained 11.8% in August. The S&P 500 index (+7.0% m-o-m) had its best August performance since 1986 bringing year-to-date gains to 8.3% at month end.
US stocks benefited from Federal Reserve chairman Jerome Powell’s announcement of a monetary policy strategy change that should keep interest rates low for a long time. The change (called average inflation targeting)could keep interest rates low even if inflation hits the Fed’s 2% inflation target.Low interest rate expectations have proven to be one of the best catalysts for stock market gains.
Technology companies have mostly thrived under COVID-19 lock downs, gaining market share as major secular themes were advanced due to lock down conditions. Ecommerce has made major gains in terms of market penetration worldwide at the expense of bricks and mortar retailers. Cloud computing and virtual-meeting companies have made triple-digit gains this year. These themes were already on the rise but were given a significant boost after the COVID pandemic forced sudden changes in how people work and live. The five top tech stocks of Apple, Microsoft,Alphabet, Amazon and Facebook now account for over 20% of the S&P 500 index.
In Europe, the stock market’s recovery from the March lows has been far more challenging. European equities, as measured by the Euro Stoxx 50 index,gained 3.1% in August taking the year-to-date performance to -12.6%. The UK’s FTSE 100 index advanced 1.1% for the month and is down 20.9% YTD. The slower equity market recovery in the UK and Europe is partly due to the financial sector where there are major concerns over the deflationary effects of the coronavirusas well as weak borrowing rates. A weaker dollar against the euro and pound has further dampened the recovery in Europe. Bank of America reported that the market capitalisation of the US tech sector surpassed that of the entire European stock market at the end of August for the first time.
Year to date, equity market performance in Asia is mixed. Japan’s Nikkei 225 index is down 2.2% YTD while Hong Kong’s Hang Seng index is down 10.7%. Chinese equities have had exceptional returns this year despite rising tensions between China and the US. The CSI 300 Index is up 17.6% year to date. There are a number of reasons behind this performance, including the efficient and effective manner in which China has handled the coronavirus pandemic. On are lative basis, China’s fiscal stimulus response to the pandemic has been relatively modest compared to that of the US and Europe. This has left room for more targeted investments in infrastructure that will support strategically important sectors of the Chinese economy.
The quality of Chinese listings has improved the last few years and this has resulted in higher allocations to Chinese equities from international investors. Investors believe the long-term opportunity of China is still intact while trade tensions have only accelerated China’s drive to become more self-sufficient in areas such as energy supply, semiconductor manufacturing and biotechnology.China is also striving to be a world leader in key next-generation technologies such as 5G, electric vehicles and artificial intelligence. This should benefit long-term investors in Chinese equities.
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