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The two summer months were positive for global equities, driven by robust market performances in developed countries.
Economic momentum remains positive
Despite economic indicators showing signs of a slowdown in recent months, global economic growth is generally still moving in the right direction. In fact, most confidence indicators, despite their decline, remain at a high level. In the eurozone, for example, the composite purchasing managers’ index for August was above the average for Q2. This is an encouraging trend and suggests the region will continue to see a strong recovery.
Asian markets weighed down by the health situation
The effects on growth of the declining health situation cannot be ignored, however. Rates of infection soared over the summer, with the highly contagious Delta variant becoming dominant in many regions around the world.
In contrast to developed markets, emerging markets' stock performance has been very disappointing. The delayed roll-out of vaccination campaigns combined with the imposition of new measures restricting movement (in China and South Korea, among others) following the resurgence of the pandemic raises fears of a significant slackening of growth in Asia. The announcement of regulatory measures in China affecting tech businesses in particular (online retail platforms, social media, tutoring sites and video games) also dampened market performance.
Following the announcement of these new measures, Chinese president Xi Jinping once again called for the country’s income inequality to be addressed, greater wealth redistribution and a clampdown on high incomes. The Chinese government has revived the idea of " common prosperity " and made it a priority.
These various measures and statements weighed heavily on Asian markets, which have shed around 5% in the last two months. For example, e-commerce giant Alibaba has dropped around 50% from its October 2020 high.
In Europe, luxury stocks slumped significantly as investors feared a downturn in sales, a third of which come from Chinese consumers. The sector’s decline must, however, be put into perspective given the industry’s excellent performance in recent quarters.
Long-term interest rates down slightly
In terms of fixed income, long-term rates in the US and Europe were down slightly over the last two months. Fears of the recovery faltering following the resurgence in the health crisis are likely to be the reason for this bearish movement. Unsurprisingly, the chair of the Federal Reserve referred specifically to this threat during the customary Jackson Hole speech. Jerome Powell refrained from touching on any disruptive effects for the financial markets and simply opened up the possibility of asset purchases being tapered as of this year, justified by the substantial progress made on the employment and inflation front.
High-quality assets still favoured by investors
In terms of asset allocation, with real yields firmly rooted in negative territory, fixed income is of very little interest to investors. Equity market valuations naturally remain strained. Spreads, meanwhile, which are still high from a historical standpoint, still attest to the attractive nature of equities in relative terms. Within this asset class, defensive, high-quality companies with strong pricing power remain the most attractive to investors as they continue to offer a favourable risk/reward ratio.
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