Global equity markets continued to march higher in June (MSCI World +1.5% MoM), helping them to a mid-teen return for 1H21. However, the flavour of those returns was quite different to the previous few months, which have been dominated by companies benefitting from post-pandemic economic normalisation (generally cyclical companies or those geared towards industries which suffered most during the pandemic). Instead, June saw the return of the “pandemic-beneficiaries” (predominantly technology businesses), with the NYSE Fang Index (comprised of the 10 largest US-listed technology businesses) outperforming the broader market by about 7% for the month.
A key catalyst for the rotation back into structural growth companies and away from cyclical growth companies was the US Federal Reserve (Fed) meeting in June, where the Fed released the quarterly updated forecasts from its members. The main point that changed for the Fed members over the three months was that more Fed members now see a marginally higher probability of inflation surprising to the upside and the number of members believing rate hikes would be appropriate in 2022 jumped from four to seven (out of a total of 18 current members). The median Fed member now believes that there should be at least two rate hikes by the end of 2023 (previously the majority thought 2024 was the right time for initial rate hikes). Investors interpreted the Fed’s change of tone as slightly bearish for longer-term growth and, besides catalysing a rotation into structural growth stocks, the US interest rate curve flattened as long-term rates drifted lower, with US 10-year bond yields ending the month 0.13% down at 1.46%.
The flatter US yield curve acted as a headwind to financial stocks (S&P 500 Financial -3% MoM), with only S&P materials companies faring worse (-5.3% MoM) in the face of generally softer commodity prices. The exception to the poor month for commodities was oil, with Brent crude oil ending the month 8% stronger as increasing demand continues to be met with a conservative supply response by the major oil-producing nations.
Emerging markets (EMs) were also held back by the rotation into growth companies, with EM equities barely eking out a positive return for the month (MSCI EM +0.2% MoM). The exception to a soft month for EM countries was Brazil and Russia, both of which benefitted from their high exposure to energy companies, which rallied along with the strong oil price. On the currency front, the US dollar had a strong month against most currencies, with Brazil again the outlier as the Brazilian real rallied 5% against the US dollar in June. Brazil’s latest GDP growth data exceeded expectations and economists have started increasing their estimates for the country’s future economic growth.